Pearl Capital Secures $15M in Financing From Chatham Capital Management
June 21, 2017
Pearl Capital Business Funding, LLC has closed on $15 million in financing from Atlanta-based Chatham Capital Management, according to the company. Pearl is a NY-based small business funder that was acquired in 2015 by Capital Z Partners, a private equity firm.
“We understand that despite personal credit issues, many small business owners have triumphed in building successful businesses,” said Pearl CEO Solomon Lax. “Locked out of the traditional bank financing channels, those small business owners turn to Pearl Capital Business Funding to enable their dreams. By partnering with Chatham, we are able to make those dreams a reality.”
Chatham has invested in other companies such as iPayment, Vitamin Shoppe, DirectTV, QVC, Neiman Marcus, and 5-hour energy, according to their website.
Pearl also secured $20 Million from Arena Investors, LP in July of last year.
Alternative Lenders Spread Their Wings Internationally
June 20, 2017
As alternative lending gains global traction, a growing number of U.S-based alternative lenders are exploring international growth, with large companies like OnDeck, Kabbage and SoFi leading the way.
Some alternative lenders have begun their expedition closer to home by extending their reach into Canada. Others are traveling farther beyond to parts of Europe and Australia, for example, while others are eying eventual growth in Asia.
Propelling the opportunity is the fact that a number of international banks are still unprepared to offer online lending on their own and thus are more amenable to partnerships with U.S.-based alternative lenders, according to Rashmi Singh, senior manager in the wealth management practice at EY.
It also helps that the options for local partners are somewhat limited. “There are not a lot of digital lenders [outside the U.S.] at the same level as some of the folks here,” Singh says.
To be sure, international expansion requires extensive time, money and regulatory know-how, and some U.S. alternative lenders may never reach the critical scale to be able to compete effectively. Nonetheless, as globalization proliferates, industry observers expect that additional forward-thinking companies will push beyond the limits of their current geographical borders.
“The question is not if, but when (and where) U.S. fintech companies will expand internationally,” contends Ryan Metcalf, chief of staff and director of international markets at Affirm, a San Francisco-based fintech that has partnered with Cross River Bank of Fort Lee, New Jersey, to allow shoppers pay for purchases over time with simple-interest loans.
Affirm—which works with more than 900 retailers and recently announced that it had processed its 1 millionth consumer installment loan—has focused on domestic growth so far, but the company is now considering a number of options for international expansion, Metcalf says.
SIZING UP THE MARKET
Certainly, there are numerous opportunities for homegrown lenders to expand internationally given the healthy growth alternative lending is experiencing in other parts of the world. Each market, of course, has its nuances and individual growth patterns.
Europe, for instance, has seen substantial growth over the past few years, with the U.K. leading the way in alternative finance. It has four times higher volumes in aggregate than the rest of Continental Europe, according to a 2016 report from KPMG and TWINO, one of the largest marketplace lending platforms in Europe. (P2P consumer lending is the largest component of alternative online lending in Europe, capturing 72 percent of the total in the first through third quarters of 2016, according to the report.)
After the U.K., France, Germany and the Netherlands are the top three countries for online alternative finance by market volume in Europe, according to a September 2016 report by the Cambridge Centre for Alternative Finance.
Asian markets, meanwhile, show significant promise for alternative finance players to make their mark due to the sizeable population of digitally savvy consumers who are still largely underbanked. China is by far the largest market for alternative lending in Asia. It’s also the world’s largest online alternative finance market by transaction volume, registering $101.7 billion in 2015, according to the March 2016 Cambridge Centre for Alternative Finance report. This constitutes almost 99 percent of the total volume in the Asia-Pacific region, the research shows. To date, most of the growth in China specifically has been from local firms, but that could change as the market there continues to develop.
Although there are many possible international markets to explore, U.S. lenders have to tread carefully before planting roots elsewhere, observers say. Some smaller U.S. lenders may find domestic expansion easier and more cost-effective because of the time, regulatory and financial commitment that goes along with exploring international markets. It’s a lot easier, for instance, to expand from New York to California, than it is to build out internationally.
“Why take on all the added costs and regulatory pressures, when you haven’t fully explored your home market, unless the business that you’re in deems it necessary,” says Mark Abrams, partner with Trade Finance Global, a London-based international corporate finance house, specializing in crossborder trade.
“It doesn’t make sense to start as a U.S. lender, do a few loans and then jump over to the U.K,” he contends.
What’s more, foreign banks looking for alternative lending partners typically prefer to work with larger, more established players. Even though new players’ technology may be ahead of the curve, the banks still want a longer track record. “It’s reputational for these banks,” says Singh of EY.
MANY CHALLENGES TO INTERNATIONAL EXPANSION
Several alternative lenders say they see significant growth opportunities by expanding internationally. At the same time, however, they are mindful of the substantial headwinds they face.
Regulation is among the biggest, if not the biggest, challenge. A lot of firms in the U.S. have invested a lot of time and money to get up to speed on U.S. regulations. When they look to Europe or to Canada or Mexico or elsewhere, there are different regulations. “If you’re speaking to folks in three continents, now you are looking at regulations times three,” says Singh of EY.
Certainly there’s a time commitment involved; it can take six to eight months for a U.S. lender to get their U.S.–based platforms compliant with regulations in another country, she says.
What’s more, regulatory barriers can vary greatly country to country, notes Metcalf of Affirm. Take Canada for example where very low barriers to entry exist with some provincial exceptions. In the U.K., on the other hand, it can take eight months or more to receive a lending license, he says.
That’s why it’s so important for online lenders to make strategic decisions about where they want to invest their time and resources—even if they have sound technology that’s easily adaptable outside the U.S. “The minute you throw in cross-border regulations, it gets very complicated,” Singh says.
Understanding the local culture of the market you’re trying to tap is also crucial, according to Rob Young, senior vice president of international at OnDeck, where he oversees all aspects of the company’s non-U.S. expansion efforts.
Within the past several years, OnDeck has begun offering small business loans to customers in Canada and Australia. Frequently Canada is a first step for U.S. companies that want to expand internationally because of the shared language and similarities between the economies, Young explains.
After the Canadian operation was successfully underway, the opportunity arose for the online lender to expand to Australia—which shares several similarities with the Canadian market. OnDeck doesn’t break out how much of its overall loan portfolio comes from these two markets, but it has announced publicly that it’s delivered more than CAD$50 million in financing to Canadian small businesses since 2014.
“So far we’re very satisfied with the performance,” Young says, referring to its expansion into both Canada and Australia.
Young notes that while a U.S.-based alternative lender can leverage certain things like technology from a central location within its home country, having dedicated teams on the ground in local markets is also critical. Marketing and pricing all have to be competitive with the needs of the local market, he says.
In Canada and Australia, for example, OnDeck has found that the “personal element” is really important. Young says customers there expect to interact with sales representatives who have ties to the community, understand the local market and can relate to the issues small businesses there are facing.
“I don’t think you can establish that rapport if you are trying to serve them with a sales team overseas,” he says.
U.S.-based alternative lenders also need to be careful to create products that fit the culture and needs of a particular market. For instance, alternative players that focus on luxury asset-based lending would want to look at countries with high concentrations of wealth. “It doesn’t make sense to grow to a country where there’s very little wealth because you’re not going to have much success,” says Abrams, of Trade Finance Global.
Even knowing the market well doesn’t guarantee results, which Lending Technologies, a white label technology provider for the MCA space, has discovered first hand.
Markus Schneider, the company’s chief executive, is originally from Switzerland and he knows the market there well, so he set out to fill a void he saw for an MCA-like product. However, Lending Technologies, which has offices in New York and Zurich, has hit some roadblocks along the way.
“It’s a very different mind-set there. People are more risk-adverse,” Schneider says.
The company already has a Swiss distribution partner in place, but has had trouble finding a lender willing to underwrite the funds. Schneider would also be willing to work with a U.S. lender that wants to partner with Lending Technologies to provide MCA services to merchants in his home country.
“We’re going to do this. It’s just a matter of time,” he says. “There’s a tremendously underserved segment of the market there.”
FINDING THE RIGHT FIT
To be successful internationally, U.S. companies also have to be willing to shift gears as needed when things aren’t working out as expected.
Take Kabbage, for example. The small business lender expanded into the U.K. in 2013, two years after its U.S. debut. But the company found that having its own small business lending business in the U.K. was too challenging for regulatory and capital reasons. It no longer offers new loans from this platform.
Instead, the funding company decided that a better global strategy was to license its technology to financial institutions in international markets a less capital-intensive, yet economically sound way of doing business.
Kabbage—which recently announced the establishment of its European headquarters in Ireland—has licensing arrangements with Santander in the U.K., Kikka Capital in Australia, Scotiabank in Canada and Mexico and ING in Spain. The company plans to launch operations in several additional countries this year where banks use Kabbage’s technology to offer online loans to their clients, says Pete Steger, head of business development at Kabbage.
“We are partnering with local experts. That’s our strategy,” Steger says.
Funding Circle has also made changes to its international strategy. Earlier this year, the company—which got its start in the U.K.—announced that it would stop issuing new loans in Spain. The Spanish version of the company’s website says that it continues to monitor ongoing loans so investors receive monthly payments for the projects they have invested in.
A spokeswoman for Funding Circle said the company continues “to look at new geographies, but we have no immediate plans for expansion and are focused on building a successful business here in the U.S., U.K., Germany and the Netherlands.” She declined to comment further.
Without divulging too many details, a handful of U.S.-based alternative financiers say they continue to look at additional markets outside their home turf.
For its part, SoFi has announced plans to expand to Australia and Canada this year. The company’s chief executive has also talked about European and Asian expansion in the future.
On the international front, Affirm is currently evaluating markets that make the most sense for its business model, Metcalf says. Affirm is also looking at possible acquisitions in developed markets such as the U.K. and Sweden as well as considering “serious investment” in new distribution models in southeast Asia, Mexico and Brazil, he says.
LendingClub, meanwhile, last November announced a significant partnership with National Bank of Canada and its U.S. subsidiary Credigy. The agreement provides for Credigy to invest up to $1.3 billion over the subsequent twelve months. A spokeswoman for LendingClub said the company has nothing to share about plans for international expansion.
As for OnDeck, Young says the company is exploring a number of options; it’s a matter of finding markets where gaps exist in small business lending and where potential customers have a willingness to borrow online.
“We want to be the preferred choice for small businesses. It’s not necessarily defined geographically,” Young says. “We review markets all the time. There are a number of markets that are interesting to us.”
The ‘Loan’ Star State – Texas is an alternative finance nexus
June 15, 2017
We’re at Able Lending in Austin, Texas, a financial technology company occupying three floors deep in the heart of the Seaholm power plant overlooking Lady Bird Lake. The fortress-like building anchors an inner-city complex of offices and residences, chic restaurants, boutique shops, and a Trader Joe’s.
Once the main source of electricity for Texas’s capital city, the natural gas-fired boilers have given way to a warren of glassed-in offices and meeting rooms connected by angular metallic stairways and a carpeted mezzanine.
It is here, in a tiny conference room, that Will Davis, a slim man of 35 and an alumnus of Harvard Business School, is drawing a bell curve on a whiteboard. Dressed for the balmy Texas weather in tan Bermuda shorts, a black tee-shirt and Nike running shoes, the company’s chief executive and co-founder is explaining how Able’s friends-and-family lending formula “widens” the risk curve.
“We all compete here in this box on price,” Davis says, drawing a square at the topmost point of the bell curve, indicating where the near-prime borrowers abide and where lenders are crowded in pursuit. But when loans from friends and family form 10%-15% of the total loan, he says, drawing squiggly lines just to the left of the box, a cohort with less-than-stellar credits now becomes credit-worthy.
Because of the “peer pressure” and “behavioral change” exerted by the involvement of family and friends, the formula produces a “positive-selection effect on the loan portfolio” Davis says, declaring: “We can serve more of the market.”
It all sounds very business-schoolish. But here’s the bottom line: Able’s lending model sharply reduces both risk and borrowing costs, allowing it to go head-to-head with national rivals like Funding Circle, Bond Street, OnDeck and StreetShares. Thanks in large part to its reduced risk, asserts Able’s director of development, 30-year-old Matt Irving, the Austin fintech can lend twice as much money as its competitors at half the interest rate.
Since opening its doors and firing up its computers in the fourth quarter of 2014, Able’s average loan size has climbed to $231,200 from $100,000. Of that, an average of 3.2 “backers” have accounted for $40,691, or 17.6% of the average total loan amount. The average “blended” annual percentage rate is 16.41%.
Meanwhile, Able, which has made some $48 million in loans to entrepreneurs through the end of April, 2017, reports CEO Davis, is itself on sound financial footing. According to the data-services firm Crunchbase, Able has raised $12.5 million in three rounds of venture capital financing from 21 investors. Principal equity financiers are Peter Thiel’s Founders Fund, Peterson Ventures, RPM Ventures, and Blumberg Capital. On Sept. 27, 2016, moreover, Able added another $100 million to its arsenal in debt financing from Community Investment Management, a San Francisco investment firm. Borrowers include owners of food trucks and apparel shops; professionals including doctors, dentists, veterinarians, and accountants; “creatives” like public relations and advertising firms; and construction companies. Since its inception, Davis says, just one borrower has defaulted, resulting in an $85,000 charge-off.
So far in 2017, the company has lent out nearly $15 million in the first quarter, but it’s on track to make $80 million this year. “We’re ramping up,” Davis declares.
Welcome to fintech in the Lone Star State. While everything may be bigger in Texas, as the saying goes, that’s not quite true of financial technology. The geographic contours of fintech operations are roughly 60% in California (especially Silicon Valley/San Francisco), 30% New York, and 10% scattered about the rest of the country, says 40-year-old Mihir Korke, the San Francisco-based chief marketing officer at Able.
Nonetheless, Texas offers fertile ground for the burgeoning fintech industry. The vaunted Texas business climate promises a relaxed regulatory regime, the absence of either a personal or corporate income tax, and a lower cost of living. All of which were cited by Able Lending, as well as an additional pair of fintech companies that specialize in factoring and merchant cash advances: Jet Capital, located in North Richland Hills in the Dallas-Fort Worth “metroplex”; and Ironwood Finance in Corpus Christi, a port city on the Gulf of Mexico.
“What’s interesting about fintech companies is that they can choose to locate where they want to do business,” says Erin Fonte, an attorney at Dykema Cox Smith in Austin whose legal practice includes mobile payments, mobile wallets and financial technology. “They don’t necessarily get a regulatory advantage because much of what they do is based on their customers’ location,” says Fonte, who is currently serving as a member of the Federal Reserve’s Faster Payments Taskforce. “That said,” she adds, “some companies have chosen to locate in Texas because of the labor and talent pool, because it’s a good source of venture capital, and it’s more affordable.”
Jet Capital’s 42-year-old chief executive, Kenneth Wardle, confirms many of Fonte’s observations. “So far, Texas has been friendly to MCA companies,” he says, using the initials for “merchant cash advance.” Especially favorable to his industry is the fact that “Texas regulators do not define an MCA as a loan,” he adds.
Prior to co-founding Jet Capital with chief operating officer Allan Thompson, 49, Wardle served as a portfolio manager at Exeter Finance Corp, a $3 billion company in nearby Irving which specializes in subprime auto financing. Wardle has also held leadership positions at AmeriCredit Corp., now GM Financial, and Drive Financial, now Santander Consumer USA.
His 20-year background has included the gritty work of repossessing cars when owners fell into arrears on their auto loans. “Most of my career in auto finance was in risk management and I’ve driven a repo truck,” he says. “You take off with the car right away and then chain it down after you’ve gone a couple of blocks so you don’t lose it out on the highway.”
Backed by more than $5 million in equity financing from a family office in Puerto Rico, Jet Capital makes cash advances of $25,000-$30,000, on average, for working capital.
The sweet spot for Jet’s financings are retail establishments, trucking companies, hair-and-nail spas, and medical doctors. Doctors in particular are prime candidates for a Jet cash advance. “They have a pretty good gap between when they perform services and when they get paid by insurance companies” during which they have to cover payroll expenses and overhead, Wardle notes. Prospecting for customers is done largely through independent sales offices, direct mail, and pay-per-click services offered by Google, among additional online channels.
“Our defaults are relatively in line with expectations” and were largely confined to the first year of business, Wardle says. “We made some underwriting and verification changes last September and October,” he adds, “and we changed our minimum credit scores. Since then we’ve seen defaults migrate in the right direction.”
Since Wardle and Thompson took occupancy of an empty office outside Fort Worth in October, 2015, Jet has grown to 12 employees who today have “a variety of roles” says Thompson, citing sales, underwriting, customer service, collections, analytics, and information technology. “They wear a lot of hats and there’s a lot of cross pollination,” he says.
Looking ahead, Wardle foresees Jet expanding its product line beyond merchant cash advances to offer lines of credit and installment loans. “Our goal is to be a one-stop, nonbank financing solution,” Wardle says.
Kevin Donahue, 37, owner of Ironwood bootstrapped the South Texas company, which opened in 2013 using personal savings of $1.5 million remaining from the sale of mobile home parks in South Dakota and Texas. He also plowed earnings into Ironwood from a subsequent job as a commercial loan broker.
Donahue, who grew up in a family of fishermen on the Oregon and California coasts and is a 2006 graduate of California Polytechnic State University at San Luis Obispo, says that he turn up in Corpus Christi somewhat by accident. While operating the mobile home park in nearby Kingsville, he got married, started a family, and put down roots.
With 20 employees, Ironwood focuses on providing merchants cash advances in the $5,000 – $50,000 range, Donahue says, “but we can go up to $1 million.” The average cash advance – usually $10,000-$15,000 – is put to use as working capital by what he dubs “Main Street” businesses: restaurants, boutiques, trucking and transportation companies, professionals, and contractors. Ironwood charges clients factoring fees that are collected via ACH.
“Many times (these businesses) don’t qualify for bank loans,” Donahue says. And even when they do qualify, he notes, “banks take forever – up to three months – while we’re using our own money and can do it in three days. We’re very low on requiring a lot of documents.”
For his part, Donahue wants to see a customer’s bank statements, a photo I.D., voided checks, and a financial report. But, he says: “Cash flow is much more important than financials.”
Clients typically find their way to Ironwood through the website, although they often arrive through referrals from brokers and real estate agents, attorneys, accountants and “anyone doing commercial lending,” he says. Donahue says he closed down a call center. “The way to get leads is more through relationships than marketing,” he says.
Trucking companies are important customers. “They work on thinner margins, the barriers to entry are lower, sometimes their customers don’t pay their bills,” Donahue says of the industry’s economics. “They have huge expenses for fuel, payroll, insurance – and they might not get paid (by their customers) for 30 days or more.”
Ironwood’s advance for a million dollars, cited earlier, was made to a trucking company in Midland, Texas, which hauled both general freight and oilfield equipment. The money was put to use both to smooth out cash flow and as growth capital. The trucking concern “used part of that for expansion, making down-payments with Volvo or Peterbilt,” Donahue recalls.
Backstopped by the titles for 18 trucks valued at roughly $1.5 million, the deal was structured as a three-year, sale-leaseback agreement with “no interest” but rather a fee, Donahue says. Payments were $32,000 monthly, he says, amounting to $152,000 above the advance.
Donahue has no trouble justifying the steep fee schedules. Not only does he release money quickly but in many instances Ironwood has stepped in to bail out businesses that could have gone belly-up. He cites a trucker in the Midwest who had a “very lucrative” business hauling Boeing jet engines worth $30 million to Seattle where they could be worked on and returned to the planes for installment. In order to fulfill the contracts – which earned the hauler $25,000 monthly — the trucking company’s owner needed to purchase pricey insurance.
The owner, however, “had horrible credit,” Donahue says, largely the result of cash flow problems after investing in a special trailer for the jet engines, compounded by a messy divorce. To secure the $10,000 for the special insurance, the trucker sold Ironwood $14,000 of their future receivables. “For his investment of $4,000 he’s making $25,000-a-month forever,” Donahue explains.
Back in Austin, Able is gearing up for another round of capital-raising to bulk up staff and, according to Korke, win licensing to do business in California. At the same time, its friends-and-family credit structure is winning kudos for reaching what researcher David O’Connell calls “the unloaned.”
A senior analyst at Aite Group, a Boston-based consulting firm, O’Connell recently completed a study disclosing that 35% of small and medium-sized businesses in the U.S were unable to obtain credit over a recent two-year period. Able’s lending model is “a good example of using covenants to structure a deal that brings down borrowing risk,” the Bostonian says. “It’s terrific.”
Able’s staff doesn’t have to travel far to witness the fruits of their efforts. On Congress Avenue, in the heart of downtown Austin, is Jae Kim’s food truck offering Korean barbecue thanks to a $100,000-plus loan from the fintech lender. Kim, the founder and chief executive at food vendor Chi’lantro, enlisted his mother to pitch in $10,000. All told, family and friends ponied up 30% of the total loan.
In the three years since he hooked up with Able, Kim has gone on to bigger things, including a television appearance last November on Shark Tank that netted him $600,000 from celebrity investor Barbara Corcoran.
Chi’lantro is now operating five restaurants and four food trucks and as Kim disclosed on Shark Tank, annual sales topped $4.7 million last year.
Able Funds Chi'Lantro from Able Lending on Vimeo.
In an interview, he told AltFinanceDaily that he counts himself fortunate to have gotten the Able “micro-loan.” It played a key role in generating the cash flow that qualified his company for a $200,000 bank loan backed by the Small Business Administration. “It was one of many opportunities, and now we have good relationships with banks,” he says.
And then, a little farther south, there’s Stephanie Beard’s “esby apparel,” a women’s clothing boutique named for her initials. Beard, 35, came to Austin in 2013 after a decade in New York designing men’s clothing at Tommy Hilfiger and Converse. Originally from North Carolina and a graduate of Appalachian State University, she had zero connections in Texas and only a little money.
But she had a big vision: She would open a store and design and sell top-quality, flattering clothes for women that had “a menswear mentality.” Men, she had discovered, buy fewer clothes than women. But men tend to buy clothes that are durable, clothes that they can wear again-and-again over many years. After she sold $65,000 worth of her casual clothing line on the website Kickstarter, Beard developed a fan base and was put in touch with Able. “Actually, they contacted me,” she says.
To qualify as an Able borrower, Beard assembled $20,000 from friends and family, she reports, including $2,500 from her future mother-in-law, another $2,500 from the proprietor of a dress shop that “wholesaled” her collection, and the rest from aficionados of her wares. Once that money was gathered, Able lent her $100,000 at a 10% APR in October, 2014, which enabled her to open her shop. The combined interest rate was 9.8%. Monthly payments have automatically been withdrawn from her business’s checking account.
She’s scheduled to repay both Able and her backers in full by this October. Total sales for the shop have cleared $1 million and Beard expects annual revenues for 2017 to hit $900,000. “A lawyer friend who helped me out with the paperwork pro bono told me that Able was practically giving money away,” she says. “I definitely was lucky.”
Humans vs. Bank Statements – An Underwriting Journey
June 8, 2017
Automation hasn’t replaced humans yet when it comes to reading bank statements in the alternative small-business finance industry. ISOs, brokers, funders and underwriters still fend off drowsiness and ignore the risk of eye strain as they pore over months of paper or electronic documents.
Many consider the drudgery a necessary part of the business. A merchant’s bank statements can reveal negative balances and commitments to previous loans or previous cash advances – any of which can indicate a bad risk, observers say. Moreover, detecting altered statements can expose fraudulent attempts to obtain credit, they add.
So why not dispense with the tedium and possible tampering of reading paper statements and pdfs? Instead, interested parties could simply obtain the login credentials for a credit or advance applicant’s bank accounts and explore their banking records firsthand. But a mixture of fear, fraud and expense often prevents that direct and relatively simple approach, multiple sources contend.
“Merchants simply don’t want to give up their username and password to enable someone to log into their bank account,” says Sam Bobley, CEO of Ocrolus, a company that specializes in automating the reading of paper statements and statements that have been converted to PDFs. Fear of somehow falling victim to an electronic robbery may be at the root of that reluctance, many in the industry agree.
Whatever the source of the hesitancy to share login information, the wariness usually seems more pronounced at the beginning of the underwriting process than toward the end, notes Arun Narayan, senior vice president of risk and analytics at Strategic Funding Source Inc., a New York City-based direct funder. “I don’t think that’s a problem after the commitment to fund,” he says, “but it is a problem before the commitment to fund.” Funders can try to leverage their market power to urge brokers to obtain a username and password from a merchant, Narayan suggests. But he admits that approach works only some of the time.
Merchants who have had a bad experience applying for loans or advances or are submitting their first application exhibit the most fear of surrendering login credentials, according to John Tucker, managing member at 1st Capital Loans, a broker with headquarters in Troy, Mich. “If they’ve been through the process before, they pretty much know what’s expected of them,” he says.
All too often, applicants balk at presenting their login information because they have something to hide, notes Cheryl Tibbs, owner of One Stop Commercial Capital, an Atlanta-based brokerage that handles deals for multiple ISOs. She says her detective work with bank statements uncovers an average of two fraudulent applications per week.
Attempts at fraud average more than five a day at Elevate Funding, a Gainesville, Fla.-based director funder, says CEO Heather Francis. Her company’s underwriters learn what to look for in bank statements that can indicate a merchant is trying to defraud a funder, she says.
First, an underwriter who’s manually checking bank statements knows that documents bearing the names of certain banks have a higher likelihood of being bogus, Francis says. Apparently, fraudsters find the statements from those banks easier to alter, or perhaps they have the templates for those banks and can plug in false information, sources speculate.
WHETHER PAPER OR PDF BANK STATEMENTS PROVIDE TO BE ON-THE-LEVEL OR NOT, READING THEM MANUALLY TAKES TIME
Besides, anyone hoping to bilk a funder can buy a customized “vanity statement” for $25 or $30 on craigslist, complete with whatever deposits, opening balances and closing balances they choose, Francis notes. That can tempt troubled merchants as well as outright criminals, observers agree.
And some of the more bizarre errors that appear in falsified statements can seem almost comical. Tibbs cites the example of a statement she saw that was supposedly for January but was populated with transactions dated in February. On altered statements the ending balance for one month might not match the beginning balance for the next month, several sources note.
Sometimes the fake numbers that wayward applicants choose to include in their fraudulent statements can send up red flags, Tibbs maintains. If a merchant is seeking $40,000 and presents account documents indicating $80,000 or $90,000 balances at the end of each month, something’s amiss “10 times out of 10,” she says.
Tibbs tells the story or a referral partner from a one-or two-person ISO calling her in a state of near-euphoria in the middle of the night, breathlessly describing a potential customer with monthly sales of $800,000 and a need for $500,000 in capital. Experience told her immediately that something wasn’t right. In the morning, she saw the statement’s ending balances of $300,000 to $400,000, which confirmed her suspicions.
Yet grafting such unlikely numbers to a forged bank statement isn’t as unsophisticated as some of the telltale signs that the industry sees when viewing bank statements manually, notes Francis. Some aspiring crooks doctor genuine statements with white-out correction fluid and then type in new numbers in a mismatched font, she says.
Anyone reading bank statements should also beware of applicants who “shotgun” applications to multiple ISOs, often on the same day, Tibbs warns. She often comes across that scam because numerous partners refer deals to her, she says.
Whether paper or pdf bank statements prove to be on-the-level or not, reading them manually takes time. An experienced underwriter who knows where to look for what he or she needs to find to verify a statement requires 15 to 20 minutes to approve one from a familiar financial institution, Francis says.
It seems that nearly every bank or credit union has its own way of designing statements, so the manual reading process slows down when an underwriter manually reads a document with an unfamiliar layout, Francis notes. Unfamiliar types of statements sometimes come from small, obscure credit unions or remote community banks, observers say.
Familiar or unfamiliar, statements represent a key part of the underwriting process, and some funders accept the time and expense of reading them manually as simply a cost of doing business, according to Francis. But that expense can become a significant portion of the cost of a credit evaluation, according to Narayan.
That’s why Narayan and his colleagues at Strategic Funding Source have been working with Ocrolus, a startup company that automates the reading of paper statements and pdf’s of statements. Ocrolus uses optical character recognition, or OCR, to automate the reading of those statements.
Simply stated, OCR enables a machine to make sense of the characters it perceives in an image, says Bobley, the Ocrolus executive quoted earlier. When the platform can’t make out certain data points, they’re snipped and verified by humans in crowdsourced mini CAPTCHA tests, which stands for Completely Automated Public Turing.
They’re those tests that ask computer users to type what they see to prove they’re not robots, Bobley notes. When two of three crowd workers agree on what an image says in the CAPTCHA test, the Ocrolus platform accepts their verdict as correct, he says.
Ocrolus envisions a large market for its new platform among the many funders still reading bank statements manually in the early stages of underwriting, Bobley says. However, in the later stages of underwriting many of those funders already use bank sync companies to verify statements.
Bank sync companies include DecisionLogic, MicroBilt, Yodlee, Plaid and Finicity. They connect directly with some financial institutions to verify statements. Funders often mention the expense when they talk about bank sync companies, and they also note that bank sync companies have not yet established connections with some lesser-known financial institutions.
But late in the funding process, Elevate Funding requires merchants to cooperate with the bank sync company it uses unless extenuating circumstance dictate otherwise, says Francis. The bank sync company can gain direct access to statements using encrypted login information that does not reveal the true username or password to Elevate Funding or the bank sync company, she maintains.
Some of Elevate Funding’s brokers maintain portals that merchants can use to provide their login credentials to get the bank sync process underway, Francis notes. The portal takes merchants to a page with Elevate Funding branding through a white-label program the bank sync company provides.
“IT HAS SAVED US FROM MERCHANTS THAT WOULD HAVE DEFAULTED…IT IS A NECESSARY TOOL – ONE THAT WE HAVE TO USE”
In about 85 percent of Elevate deals, the bank sync company is connected with the merchant’s financial institution and therefore theoretically capable of gaining access to the accounts in question, Francis notes.
Over the past 30 days the Elevate Funding bank sync results included 3 percent bank error and 17 percent merchant error, while 73 percent of the statements were verified, Francis says. Bank error occurs when the bank sync company is connected to the bank but still can’t obtain the account information. Merchant error sometimes happens when the potential client provides an incorrect user name or password, probably after forgetting the right one. Merchant error can also mean that the applicant was plotting fraud and abandoned the bank sync process upon realizing he or she was about to get caught.
The upshot? Some 73 percent of the bank statements submitted are verified, meaning that the information the merchants submitted matches the numbers at the bank, Francis reports. That also means that for whatever reason 7 percent don’t even start the process they’ve requested, she says.
Meanwhile, the bank sync connection also provides real time data that would indicate to the funder whether the merchant has had a decline in sales, an increase in negative activity or the recent addition of a credit provider, Francis says.
The service can pay off. In an average month, the bank sync service detects about 10 or 15 bad deals that Elevate Funding underwriters had accepted, Francis says. “It has saved us from merchants that would have defaulted,” she says. “It is a necessary tool – one that we have to use.”
But what about those cases where the bank sync company can’t connect with the financial institution and the merchant still won’t give up the login for the account? At 1st Capital Loans, Tucker can sometimes handle the situation by getting a bank activity sheet that lists transactions. If that type of sheet’s not available, he arranges a phone call to with a representative of the bank to verify that nothing’s amiss with the applicant’s bank account.
It’s another example of how – even with today’s rampant automation – the human touch sometimes remains indispensable in assuring that merchants deserve the loans or advances they seek.
MCA Company Wins Case After Judge Actually Reads the Contract
May 5, 2017
An explosive New York Supreme Court decision in December against a merchant cash advance company just lost some of its bite, thanks to a decision handed down by the Honorable Catherine M. Bartlett in Orange County.
By all accounts, plaintiff Merchant Funding Services, LLC (“MFS”) had reason to be worried when Long Island attorney Amos Weinberg appeared on behalf of defendants Micromanos Corporation and Atsumassa Tochisako. MFS and Weinberg squared off last year in an almost identical case when Weinberg represented a company named Volunteer Pharmacy, Inc. There, a Westchester County judge decided the agreement in question to be criminally usurious on its face, leaving no question of fact for a trier of fact to resolve. According to court records, Weinberg has been relying on that decision to bolster his legal arguments against other MCA agreements ever since.
But up in Orange County, less than an hour northwest of Westchester, the court there sided in favor of MFS on Thursday, even after being briefed on the Volunteer Pharmacy decision.
Defendants, citing Merchant Funding Services, LLC v. Volunteer Pharmacy Inc., 44 NYS3d 876 (Sup. Ct. Westchester. 2016), assert that a plenary action is not required in the circumstances of this case because the Secured Merchant Agreement is, on its face and as a matter of law, a criminally usurious loan. However, Defendants’ position is grounded on a dubious misreading of the Agreement.
Micromanos, like Volunteer Pharmacy, was seeking to vacate the confession of judgment entered against them by way of a motion rather than by filing an entirely new lawsuit.
Here, the judge not only rejected that the confession of judgment be vacated but she also admonished Micromanos for misleading the court over the actual wording of the contract in order to serve their argument.
The agreement on its face provided for MFS’s purchase of 15% of Micromanos’ future receipts until such time as the sum of $224,250 has been paid. Paragraph 1.8 of the Agreement recited the parties’ understanding – directly contrary to Defendants’ claims herein – that (1) MFS’ purchase price was being tendered in exchange for the specified amount of Micromanos’ future receipts, (2) that such purchase price “is not intended to be, nor shall it be construed as a loan from MFS to Merchant”, and (3) that payment by Micromanos to MFS “shall be conditioned upon Merchant’s sale of products and services and the payment therefore by Merchant’s customers…”
These provisions not withstanding, Defendants contend that the Addendum altered the essential nature of the Agreement by requiring a Daily Payment of $2,995.00 on pain of default, thereby eliminating any element of risk or contingency in the amount or timing of payment to MFS, and converting the Agreement into a criminally usurious loan bearing interest at the rate of 167% per annum. Not so. The Addendum expressly provided that the $2,995.00 Daily Payment was only “a good-faith approximation of the Specified Percentage” of 15% of Micromanos’ receipts, and that Micromanos was entitled to request a month-end reconciliation to ensure that the cumulative monthly payment did not exceed 15% of Micromanos’ receipts. Defendants’ contention that MFS was entitled under the Addendum to the $2,995.00 Daily Payment without being obliged to offer Micromanos a month-end reconciliation is founded on an incomplete and palpably misleading quotation of paragraph “d” of the Addendum.
According to Defendants, paragraph “d” states:
“The Merchant specifically acknowledges that ***the potential reconciliation*** [is] being provided to the Merchant as a courtesy, and MFS is under no obligation to provide same”.
As noted above, paragraph “d” actually states:
“The Merchant specifically acknowledges that: (I) the Daily Payment and the potential reconciliation discussed above are being provided to the Merchant as a courtesy, and that MFS is under no obligation to provide same, and (ii) if the Merchant fails to furnish the requested documentation within five (5) business days following the end of a calendar month, then MFS shall not effectuate the reconciliation discussed above.”
The Defendants’ omission fundamentally alters the meaning of paragraph “d”. Contrary to Defendants’ assertion, the gist of paragraph “d” is that the institution of the fixed Daily Payment plus month-end reconciliation mechanism as a substitute for Micromanos’ daily payment of 15% of its actual receipts was a non-obligatory courtesy. Paragraph “d” plainly does not enable MFS to require a $2,995.00 Daily Payment while concomitantly refusing Micromanos’ request for a reconciliation.
Defendants further contention that the Agreement as a matter of law eliminated all risk of hazard of nonpayment by placing Micromanos in default upon any material adverse change in its financial condition is not borne out by the language of the Agreement. Under Paragraphs 2.1 and 3.1 of the Agreement, Micromanos’ failure to report a material adverse change in its financial condition, not the adverse change itself, was defined as an event of default.
Therefore, the Secured Merchant Agreement is not on its face and as a matter of law a criminally usurious loan. Consequently, Defendants have failed to establish an exception to the general requirement that relief from a judgment entered against them upon the filing of an affidavit of confession of judgment must be sought by way of a separate plenary action.
It is therefore ORDERED, that Defendants’ motion is denied.
Alarmingly, court documents show that Micromanos attorney Amos Weinberg is relying on the same “incomplete and palpably misleading quotation” in other cases involving other merchant cash advance contracts to serve his arguments. Fortunately, in this case, the Honorable Catherine M. Bartlett compared his quotation of the contract to the actual language of the contract and saw they didn’t match up. While a decision from the Supreme Court in Orange County doesn’t mean that the matter is settled for good in New York State, it does potentially put the decision that arose from Volunteer Pharmacy on very shaky ground.
Merchant Funding Services, LLC v. Micromanos Corporation d/b/a Micromanos and Astsumassa Tochisako can be found in the New York Supreme Court under index number: EF000598-2017
Fintech Sandbox? States, OCC Mull Regulatory Options
May 2, 2017It’s called the “New England Regulatory FinTech Sandbox.”
State banking regulators across the six New England states are exploring the creation of a regional compact that would allow financial technology companies to experiment with new and expanded products in “a safe, collaborative environment,” says Cynthia Stuart, deputy commissioner of the banking division at the Vermont Department of Financial Regulation.
Stuart asserts that she and her New England cohorts are adroitly positioned and uniquely qualified to oversee laboratories of finance. In Vermont, for example, she heads an agency that oversees regulation and examination of banks, trust companies, and credit unions as well as such nonbank financial providers as mortgage brokers, money transmitters, payday lenders and debt adjusters.
Financial watchdogs at the state level, Stuart observes, “are already witnesses to a wide breadth of financial services offerings and understand how they impact communities and consumers. As technology intersects with financial regulation,” she adds, “state regulators also appreciate the need to be open to technological innovation while balancing risk and return.”
The regional fintech sandbox is the brainchild of David Cotney, the former Massachusetts Commissioner of Banks, and Cornelius Hurley, director of Boston University’s Center for Finance, Law and Policy. The sandbox stitches together elements of Project Innovate, a development program for fintechs inaugurated by the U.K.’s banking regulator, and the European Union’s “passport” model for cross-border banking operations.
In the U.K., the Financial Conduct Authority is supporting both small and large businesses “that are developing products and services that could genuinely improve consumers’ experience and outcomes,” according to a 2015 report by the London agency. In harmonizing the regulatory regime for the sandbox across state lines of Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and Connecticut, the program emulates the EU’s “passport.” Since 1989, a bank licensed in one EU country has been able to set up shop there while – thanks to the “passport” –operating seamlessly throughout the 28 states of the EU (soon to be 27 after “Brexit”).
“It’s still preliminary,” Cotney says of the proposed New England sandbox-cum-passport, “but we’ve talked to the financial regulators in all six states and there’s universal openness. Nobody want to be seen as being a barrier to innovation.”
(Barred by law from lobbying in Massachusetts, Cotney hands off the Bay State duties to Hurley while he meets with regulators and other officials in the five remaining New England states. In March, Cotney was named a director at Cross River Bank, a Fort Lee, N.J.-based, $600 million-asset community bank known for its partnerships with peer-to-peer lenders including Lending Club, Rocket Loans and Loan Depot.)
This nascent effort of financial Transcendentalism in New England is, meanwhile, taking place against the backdrop of an increasingly acrimonious battle between the Office of the Comptroller of the Currency and state banking authorities over the licensing and regulation of fintech companies. At issue is the OCC’s plan announced in a December, 2016 “whitepaper” to issue a “special purpose national bank” charter to nonbank fintechs.
Siding with the OCC are the fintechs themselves, including Lending Club, Kabbage, Funding Circle, ParityPay, WingCash. “A special purpose national bank charter for fintechs creates an opportunity for greater access to banking products, empowers a diverse and often underserved customer base, promotes efficiency in financial services, and encourages industry competition,” Kabbage wrote to the OCC in a sample industry comment to its whitepaper (which is on the agency’s website).
Also on board for the OCC’s fintech charter are powerful Washington trade associations such as Financial Innovation Now, the membership of which comprises Amazon, Apple, Google, Intuit and PayPal, and industry research organizations like the Center for Financial Services Innovation. The U.S. banking establishment also appears largely supportive of the OCC. While qualifying its imprimatur somewhat, the American Bankers Association declared that it “views the OCC’s intent to issue charters as an opportunity to further bring financial technology into the banking system…”
But an irate army of detractors is condemning the fintech charter outright. Consumer groups, small-business organizations, community banks, and state attorneys general number among the furious opposition. No cohort, however, has been more hostile to the OCC’s fintech charter than state banking regulators.
Maria T. Vullo, superintendent of New York State’s Department of Financial Services, has emerged as a firebrand. “The imposition of an entirely new federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape,” she wrote to the OCC earlier this year, “will invite serious risk of regulatory confusion and uncertainty, stifle small business innovation, create institutions that are too big to fail, imperil crucially important state-based consumer protection laws, and increase the risks presented by nonbank entities.”
Although big-state regulators from New York, California and Illinois have been in the vanguard of opposition, their unhappiness with the OCC is widely shared. Vermont regulator Stuart, who emphasizes the need for regulators “to embrace change,” nonetheless disparages the OCC’s endeavor.
“Of particular concern is the creation of an un-level playing field for traditional, full-service Vermont institutions to the advantage of the proposed nonbank charter,” she told AltFinanceDaily. “The special purpose national nonbank charter would not be subject to most federal banking laws and would be regulated with a confidential OCC agreement. The disparity in regulatory approaches is concerning.”
What had been confined to a war of words – rounds of angry denunciations packed into letters and press releases directed at the OCC — reached fever-pitch last week when, on April 26, the Conference of State Banking Supervisors filed suit against the OCC in federal court. The lawsuit seeks to prevent the agency “from moving forward with an unlawful attempt to create a national nonbank charter that will harm markets, innovation and consumers,” according to a CSBS statement.
Among other things, the conference’s complaint charges that by creating a national bank charter for nonbank companies, the OCC has “gone far beyond the limited authority granted to it by Congress under the National Bank Act and other federal banking laws. Those laws,” the conference’s statement continues, “authorize the OCC to only charter institutions that engage in the ‘business of banking.’”
Under the National Bank Act, the conference’s complaint asserts, a financial institution must “at a minimum” accept deposits to qualify as a bank. By “attempting to create a new special purpose charter for nonbank companies that do not take deposits,” the complaint adds, the OCC is acting outside its legal authority.
Christopher Cole, senior regulatory counsel at the Independent Community Bankers Association – a Washington, D.C. trade association of Main Street bankers known for punching above its weight — asserts that the state banking regulators are on solid ground. “The whole question comes down to what should a bank be for purposes of a national bank charter,” he says in a telephone interview. “The Bank Holding Company Act (of 1956), federal bankruptcy laws, and tax laws – all three – define banks as insured depository institutions. It’s right there in the statutes. So our recommendation,” he says, “is for the OCC to go back to Congress” and ask for the explicit authority to create a fintech charter.
Because the OCC has “short-circuited rule-making” protocol required by another law – known as the Administrative Procedures Act — “the process hasn’t been kosher,” Cole adds.
Many members of Congress are also expressing outrage at the OCC. Not only have Democratic Senators Sherrod Brown of Ohio and Jeff Merkley of Oregon strenuously objected to the OCC’s fintech charter, but on March 10, 2017, Jeb Hensarling, the chairman of the House Financial Services Committee, fired off a “hold-your-horses” letter to Comptroller Thomas J. Curry. Signed by 34 House Republicans, the March 10 letter reminded Curry that his term of office would officially be up at the end of April, 2017, and urged him not to “rush this decision” regarding the fintech charters.
“If the OCC proceeds in haste to create a new policy for fintech charters without providing the details for additional comment, or rushing to finalize the charter prior to the confirmation of a new Comptroller,” the letter from Hensarling et alia declares, “please be aware that we will work with our colleagues to ensure that Congress will examine the OCC’s actions and, if appropriate, will overturn them.”
Never mind the stern letter from Chairman Hensarling, or the fact that an impressive array of Congressmembers on both sides of the aisle are bipartisanly unhappy, or that state banking regulators’ have filed suit, or that Curry’s replacement as Comptroller is overdue: the OCC is pushing ahead. The agency will play host to a bevy of financial technology companies and other financial institutions on May 16 for two days of get-acquainted sessions in its San Francisco office.
Billed as “office hours,” the West Coast meetings will consist of one-on-one, hour-long informational meetings “to discuss the OCC’s perspective on responsible innovation,” Beth Knickerbocker, the OCC’s acting chief innovation officer, says in a press release.
The office hours, Knickerbocker adds, “are an opportunity to have candid discussions with OCC staff regarding financial technology, new products or services, partnering with a bank or fintech company, or other matters related to financial innovation.”
Back in New England, Hurley, the Boston University law professor advocating the regional sandbox, says: “No one knows where fintech is going. But one place it’s not going is away.”
Re-Banked
April 23, 2017
Just a few years ago, the financial services community was fixing for a battle of David and Goliath proportions—with scrappy, upstart online lenders threatening to rise up and vanquish the fearful and mighty brick and mortar banks. Instead, the unexpected happened: a number of well-respected online lenders and banks set aside their battle arms and began looking for ways to collaborate with their rivals—offloading loans, making referral agreements and establishing more formal partnerships, for example.
“In the real world, sometimes David wins. Sometimes Goliath wins. Just as plausibly, sometimes both sides carve up a market and they often have different offerings that target unique customers,” says Brayden McCarthy, vice president of strategy at Fundera, a New York-based marketplace for small business lending that works with a variety of lenders, including traditional banks.
Certainly, the change didn’t happen overnight. But over time, both online lenders and banks have been forced to tailor their expectations more closely to market realities. Despite their fast growth trajectory, several online lenders have come to realize that they lack several things many banks have, namely a strong, time-tested brand, a solid customer base and ample capital. Banks, meanwhile, have realized that their slow start out of the gate with respect to technology is a severe competitive disadvantage, and that they need more nimble, savvy partners to stay in the game.
Given these shifts, more and more online lenders and banks are taking the approach that if you can’t beat ‘em, join ‘em. Although some industry leaders are actively pursuing strategies that put them in direct competition with banks, partnerships of varying degrees between traditional banks and alternative players are increasingly common. As a result, the lines separating the two are getting increasingly blurry.
“Market forces are acting as a shotgun at the wedding. Whether the two sides are entirely comfortable with the marriage is irrelevant, they need one another,” says Patricia Hewitt, chief executive of PG Research & Advisory Services LLC in Savannah, Georgia. “They’re stronger together than they are alone.”
The evolution of Square is a prime example. The San Francisco-based company really packed a punch in the merchant services world with its mobile card reader designed for small businesses. From there, the payments company sought additional ways to diversify, eventually turning to merchant cash advance as a way to help small business customers obtain funds quickly. Then, in March of last year, Square moved into online lending, teaming up with Celtic Bank of Utah to offer small business loans online. The partnership got off to a running start. In its most recent earnings report, Square said it facilitated 40,000 business loans totaling $248 million in the fourth quarter of 2016—up 68 percent year over year—while maintaining loan default rates at roughly 4 percent.
Even SoFi, the San Francisco-based online lender that has been pointedly outspoken in its anti-bank rhetoric, now has bank-like aspirations. In February, the lender acquired mobile banking startup Zenbanx, giving it the ability to offer checking accounts and credit cards in 2017. Also in February, SoFi teamed up with Promontory Interfinancial Network to enable community banks to purchase super-prime student loans originated by the online lender. Large banks have been buying SoFi loans for several years.
COLLABORATION IS THE WAVE OF THE FUTURE
Many see collaboration between banks and online lenders as a logical step in the industry’s evolution. Online disrupters have forever changed the face of lending—in the same way that online brokerage shaped the financial advisor industry, according to Bill Ullman, chief commercial officer of Orchard Platform.
“There’s a tendency to want to view things as either black or white, online lenders vs. banks. The reality is that the entire financial services industry is undergoing a transformation with technology as the core driver,” he says. “I am of the view that both traditional financial services companies and fintech players can survive and thrive,” Ullman says.
For its part, Orchard recently inked a deal with Sandler O’Neill that provides access to the Orchard platform for the investment bank and brokerage firm’s bank and specialty finance clients. The deal is expected to help small banks better evaluate their options with respect to online lending opportunities.
Partnerships between online lenders and banks take many forms. Some of them are behind the scenes, where marketplaces sell loans to banks or banks informally refer customers. Others are more public. For example, in September 2015, Prosper and Radius Bank of Boston teamed up to offer personal loans to certain customers through the bank’s website using the Prosper platform. Customers can borrow from $2,000 to $35,000 in this manner.
Then in December 2015, JPMorgan Chase and OnDeck joined forces in order to dramatically speed up the process of providing loans to some of the banking giant’s small business customers. In April 2016, Regions Bank and Avant announced a partnership to better serve customers who don’t meet Regions’ credit criteria.
Avant’s customers typically have a credit score between 600 and 700, while Regions sets the bar higher. “The benefit for banks is that they do not need to worry about a platform taking away customers that meet their own credit criteria,” according to Carolyn Blackman Gasbarra, head of public relation at Avant.
She notes that Avant expects to replicate this model with more banks in 2017. “Lately many platforms and banks have come to realize their counterparts are more friend than foe,” she says.
Given the changing tides, industry watchers expect to see more relationships develop between online lenders and banks over time. These could include referral agreements, technology licensing arrangements, formalized revenue-sharing partnerships and perhaps even outright acquisitions.
PARTNERSHIP ADVANTAGES
Certainly, working together can be mutually beneficial for both online lenders and banks. For new online lenders and other fintech players, partnering with an established bank allows them to bypass significant regulatory and compliance hurdles because the necessary requirements are already in place.
“Why jump through all the hoops when you can just have a buddy system with an existing lender?” says Kerri Moriarty, head of company development at Cinch Financial, a Boston-based company dedicated to helping people make smarter investment decisions.
Fintechs that license their technology to banks still have to meet the high standards of third-party vendors determined by bank regulators, notes Stan Orszula, co-head of the fintech team at the Chicago law firm Barack Ferrazzano Kirschbaum & Nagelberg LLP.
“But it’s still less onerous than being a direct lender,” says Orszula, who works closely with banks and fintech providers on legal, regulatory and corporate issues. “They are learning that they need banks. They really do.”
Even seasoned online lenders that have a regulatory framework in place can benefit from bank relationships by using banks’ established brands as leverage. “Everyone knows Chase, Bank of America and American Express,” says McCarthy of Fundera. “They have a solid name and a solid in-built customer base to be able to offer product to them,” he says.
Teaming up with a bank gives added credibility to an online lender, at a time when the public’s confidence has faltered due to highly publicized troubles at certain firms. “Partnering has a very important signaling effect that these online players are here to stay,” McCarthy says.
Banks, meanwhile, need the nimbleness and innovation that online lenders provide. “Banks realize they have to catch up with the fintech disrupters,” says Mark E. Curry, president and chief executive of SOL Partners, which provides strategic management and information technology consulting services to financial services companies.
DIFFERENT TYPES OF PARTNERSHIP OPPORTUNITIES ABOUND
When it comes to partnerships between banks and online players, there are numerous options. In the small business lending space, for example, McCarthy of Fundera says he expects banks to continue buying loans from online lenders, as they have been for many years. He also expects more banks will route declined applicants to online lenders or online loan brokers. “This is a partnership that will allow them to make up some incremental revenue by referring business,” he says.
In addition, McCarthy says he expects banks to make products available through online marketplaces and use an online lender’s technology for online loan applications. He also expects banks will use online lenders’ technology for underwriting and servicing loans.
Years ago, before John Donovan joined Bizfi, he recalls talking to a salesman for a large national bank. The bank didn’t offer a lending product that he could give to small businesses and the salesman was losing customers as a result. “That’s where we see a lot of those opportunities,” says Donovan, chief executive of the online marketplace for small business loans.
For instance in March 2016, Bizfi partnered with Western Independent Bankers, a trade association, for over about 600 community and regional banks, to link small business clients to financing options through Bizfi. Many banks don’t offer small business loans below $150,000, whereas the average loan Bizfi does is $40,000, Donovan says, adding that the company would like to develop additional relationships similar to its agreement with Western Independent Bankers.
In the future, he predicts fintechs will continue to be more receptive to the idea of working with banks and vice versa, as the industry digests the impact of deals that are still in their early days.
FINDING STRATEGIC GROWTH OPPORTUNITIES
As banks and online lenders become increasingly accustomed to working together, there may be more opportunities for strategic acquisitions. For instance, Sandeep Kumar, managing director of Synechron, a global consulting and technology firm, expects to see banks—especially mid-tier players that don’t have the resources to innovate like big banks buying lending-related start-ups. He says banks will likely be most interested in companies that can help them with AI and other techniques to pinpoint where they should spend more efforts on cross-selling and customer profiling, for example. “There are many start-ups in this area that have very compelling technology,” he says.
On the other hand, Chris Skinner, an independent commentator at The Finanser Ltd., a research and consulting firm in London, points out that the two cultures don’t always mesh. “Quite a few startups have young, entrepreneurial founders that would loath the idea being acquired by a bank. So it really depends on the circumstances,” he says.
Valuation differences between large banks and leading online lenders may also be a sticking point for some deals, Ullman of Orchard points out. Banks’ concern over their valuation “will place a certain amount of restraint and discipline on the tech M&A activities they pursue,” he says.
ANTICIPATING TROUBLE IN PARADISE
While increased collaboration between online lenders and banks sounds good on the surface, John Zepecki, group head of product management for lending at D+H in San Francisco, urges both sides to proceed with caution. “You have to find an arrangement where you don’t have conflict,” he says. “If your innovation partner also is a competitor, it’s a challenge. If you have an inherent conflict, it doesn’t get better over time.”
That’s one reason why companies like Chicago-based Akouba have come on the scene. In Akouba’s case, its goal is to provide banks with the technology such that they don’t have to partner with an online lender that has the potential to compete for business. “We don’t compete with the bank in any way whatsoever,” says Chris Rentner, the company’s founder and chief executive.
Akouba’s business lending platform—which the American Bankers Association endorsed in February—provides banks with leading edge technology that integrates the bank’s own unique credit policies into a convenient, online process—from application to documentation— all the way to closing and funding. The bank uses its own credit policies, originates its own loans and owns the entire brand and customer relationship.
Rentner says he started the business with the idea in mind that the online lending model wouldn’t be sustainable long-term and that working alongside banks—as opposed to competing head to head— was the direction to go. “The idea that they could somehow get all of the consumers out of the banking world and onto their platforms was never going to happen. That’s why we exist today,” he says.
Text The Merchant, Close The Deal
April 15, 2017
About a year ago, Cheryl Tibbs, general manager of Douglasville, Ga.-based One Stop Funding, was having trouble getting in touch with one of her clients. The merchant in question runs a lawn care service and is usually out on the job, so he isn’t quick to return phone calls or respond to email messages.
“I just got the idea to send a text,” Tibbs recalls. She typed a message expressing her regret for intruding but letting her client know that he needed to take certain steps to advance the funding process for his loan application. He texted right back.
After that initial success, the texting continued between Tibbs and the lawn care provider. He’s been a customer for us for a while, and that’s just how we communicate,” she says. “It’s easy for him to stop and shoot me a text as opposed to having a full conversation with me.”
Tibbs isn’t alone in her appreciation for text messaging as a part of the sales process. Quick responses to texts are making the medium increasingly important in the alternative small-business funding business, maintains Gil Zapata, CEO of Miami-based Lendinero. “Text messaging is more powerful than emailing nowadays,” he declares.
One reason for that shift is that texts are easy to use, according to Tibbs. “It’s a matter of convenience for the merchant,” she contends. “In this business, any way you can make it easier for the merchant to facilitate the transaction with you is the method you have to use.”
Besides the convenience, there’s the sense of urgency people feel when they receive a text, asserts Jeb Blount, a sales trainer who’s written eight sales-oriented books, including the bestselling Fanatical Prospecting. “When you send a text message you move to the top of a person’s priority list,” he says. In fact, people who are talking face-to-face often disengage from the conversation to respond to a text message, he notes. “It’s treated as something that’s urgent.”
As texting becomes more commonplace in the alternative-finance business, some industry salespeople are beginning to view the medium in the same way they regard email, telephones and fax machines. “I use them as another tool for follow-up communications,” John Tucker, managing member of 1st Capital Loans in Troy, Mich., says of text messages. “In addition to sending them an email, I’ll shoot them a text.”
Texting has become almost standard procedure at Florida-based Financial Advantage Group LLC, according to Scott Williams, the firm’s managing member. He prefers that sales associates make the initial contact by phone to get a sense of what the merchant is looking for in a funding deal. After gathering information and getting approval, it’s best to send the offer by email so the merchant has “all the numbers in black and white” and more details than a text message can hold, he notes. After that, text messages can deliver requests for additional documentation and provide updates on the progress of the funding process. “We can tell them, ‘Hey, everything got cleared this morning – we should be able to do the funding this afternoon,’” he says.
Texting expedites communication regarding renewals, too, Williams observes. “If a merchant is 50 percent paid back, you can check in and see if they need some additional capital right now,” he says. “It’s really good for that.”
Clients can use messaging to convey images of documents needed in the funding process, Tibbs says. “I had a merchant yesterday who sent me over her IRS tax agreement through picture message,” Tibbs says by way of example. Often, funders request color images of both sides of an applicant’s driver’s license, she notes. To fulfill such requirements, it’s generally easier to snap a photo with a phone and send it as a picture message than to scan pages of paper into a computer to create an electronic document and then send the resulting file by email. “We do a lot with picture messaging,” she observes.
But as useful as text messaging can become for contacting phone-shy clients or helping clients share an image to document a key cancelled check, companies should exercise care when using the medium for prospecting, warns Zapata. He and just about everyone else AltFinanceDaily consulted emphasizes that sending unsolicited text messages can violate Federal Trade Commission regulations. “Just because our industry isn’t regulated doesn’t mean there aren’t regulations out there on the side,” he says.
Most say they learned of the regulations from third-party vendors who specialize in sending batches of text messages simultaneously. The key to sending those groups of messages legally is to get permission from the recipients in advance, notes Ted Guggenheim, CEO of TextUs, a Boulder, Colo., company specializing in multiple-texting services. “If you’re (randomly) contacting people you got off a list somewhere, that’s a pretty bad idea,” he maintains.
The feds heavily regulate five-digit short-code texts but tread lightly with long-code texts – the ones sent from 10-digit phone numbers, Guggenheim says. The latter would apply in alternative finance, and if a text recipient calls back on the phone number associated with a long-code text, someone will answer, he notes.
Citing guidelines from the Cellular Telecommunications Industry Association (CTIA), Guggenheim stipulates that consumers should have the ability to opt out of additional messages after receiving the first one. Members of the industry who want to send groups of text messages can post conditions on their websites that compel users to grant permission to contact them by text if they submit their contact information, he suggests.
After ensuring everything’s legal, Tucker reports 1st Capital Loans nets a good response when he uses a vendor to blast multiple identical text messages to lists of prospective clients who have already granted permission for his company to contact them by text message. The strategy has helped bring in a reasonable number of deals because the prospects were “already in the pipeline,” he notes.
Remember, though, that cell phone numbers change more often than land line numbers, Tucker cautions. That means a call to a number that’s been reassigned could inadvertently fall into the unsolicited text message category that violates federal rules, he says. “You could be texting a 14-year-old,” instead of a small business, he warns.
When mounting a mass text campaign, marketers are wise to avoid lengthy missives, according to Tibbs. “Keep it simple,” she says. A typical message from her might read: “Looking for funding? Looking for capital? Give us a call,” she notes.
In business texts, avoid acronyms like “LOL” and write in complete sentences with proper punctuation and capitalization, Blount suggests. “Begin by typing out the message somewhere other than in the text box, read it, make sure it makes sense and then send it,” he says. Put your name with the word “from” at the top of the message so the recipient knows who sent it, he emphasizes.
Keep messages conceptual rather than marketing-oriented, Guggenheim advises. Messages should directly address the customer’s situation to avoid seeming they were sent by a robot, he says. As with any response a salesperson receives, getting back to customers quickly pays off in better results, he adds. When sending a batch of texts, vendors of the bulk service can ensure every text bears the same phone number that the sales rep uses to call the client, thus avoiding the possible confusion of using more than one number, says Guggenheim. The system he offers can trigger a pop-up on the computer screen of a specified salesperson when a text recipient responds, he says. It also keeps management informed of the volume of texts and the response rate, he says. That helps managers determine which types of text messages are working, he maintains.
Users can also rely on Guggenheim’s TextUs system to schedule messages for delivery in the future to remind clients of meetings. The system detects land-line numbers and informs the user that the phone will not receive text messages, and it integrates with customer-relationship management systems to exchange information, he says.
So used properly, texting can offer benefits for everyone involved. But some unscrupulous players still insist upon using the medium to mislead prospective clients, says Zapata. His customers have shown him texts from competitors who make initial contact or early contact by sending text messages that might look like offers but are really just marketing letters, says Zapata. That approach, which might tout the availability of $50,000, can cause problems when it turns out that the merchant qualifies for only $25,000, he explains. “Trust me, you’re not going to look like the good guy,” he says of the firms that send what he considers objectionable text messages.
Sensitivity comes into play with text messaging, according to Blount. He and other sources say a great number of people regard email as business-oriented and texts as personal. That leads them to nonchalantly delete unwanted email messages but to become angry when they receive a text they didn’t want, he says. “You can’t send text messages to customers if they don’t know you,” he counsels.
Once a relationship is established, however, text messages can nurture it, Blount maintains. Suppose two businesspeople meet at a networking event and exchange business cards, he says. He advises noting the cell number on the card and sending a LinkedIn invitation immediately after meeting the potential client. Twelve hours later he would send a text message mentioning the encounter. If the salesperson can get the potential client to respond to a text message, that prospect is granting permission to receive texts, he says.
Blount’s example seems to suggest the line between business and personal may be blurring when it comes to texting. People often check their email messages on phones these days – instead of on a laptop or desktop computer – which also minimizes the difference between texting and emailing, says Tibbs. “Everybody does everything with their phone these days,” she notes.
Communicating through a more personal channel such as texting has advantages, too, Williams contends. That’s because some merchants consider their financing to be personal and don’t want to broadcast the details to employees, he says. To protect their privacy, merchants often provide financial institutions with their cell phone number instead of their office number or toll-free line, he notes.
Meanwhile, the world continues to become more comfortable with texting. When Williams and his sales associates began messaging clients about four years ago, they found younger customers receptive and older ones reluctant, he remembers. In the intervening years, however, the 50 plus crowd has warmed to the medium, he observes.
An advantage that accrues with text messaging – compared with email – arises from the fact that spam filters and spam folders don’t seem to have a place in the world of texting. Several sources cite that as a big advantage with using texts. “If you send someone a text message, they’re going to see it,” notes Zapata.
Asked about a downside to the proper use of text messaging in business, most sources could not name one. However, Williams has discovered one area where the mode of communication comes up short. “I would not deliver bad news over text-messaging,” he advises. “If the merchant is upset or frustrated by the news, it would be better-handled in a phone call so you could explain the reason for the negative news. A text message leaves too many things unsaid.”
