Tech-powered platforms like Kabbage and OnDeck have been competing with banks on small-business lending for some time. Now a new breed of players is raising the stakes. Over the past year, nonbank companies including Alibaba, PayPal and Square have begun offering business loans directly through their dominant e-commerce and payments platforms.
Although these companies currently offer smaller business loans than many banks are willing to make, banks can't assume that this situation will stay the same. All three already have a massive, highly engaged user base. Given that PayPal gained 5.8 million new users in the first quarter and that Alibaba is preparing for what many predict will be a massive initial public offering, they're clearly hungry to expand even further. The more lending relationships these companies build with existing customers, the more they'll be able to expand into the desirable, higher-dollar lending segments banks covet.
In order to stay relevant in small-business lending, banks need to learn from these forward-thinking companies by simplifying their own lending process and integrating the process closely with existing financial platforms. Otherwise, these newer, fiercer competitors' convenience and speed could force banks out of the small-business lending for good. Here are three ways that banks can up their game.
Allow for automatic repayments and deposits
This should be the first step banks take to simplify their loan processes. It requires comparatively little effort, and nearly every successful alternative lending platform does it already. Alibaba's Taobao division and PayPal's Working Capital program automatically deposit loans and withdraw repayments using business owners' in-platform wallets. Established alternative lenders like OnDeck and Kabbage do the same with borrowers' existing bank accounts. Since banks control those very accounts, they have no excuse for lagging behind. As long as they do, they're letting competitors use their own platforms and resources against them.
When taking this first step, it's important for banks to enable this automation for a variety of account types. Many small business owners use their personal bank accounts for business purposes. Banks won't be able to make their loan programs truly accessible if automatic repayments and deposits work for only a fraction of their customers.
Automate user data analysis to speed up the loan review process
PayPal and Taobao already offer this exact service, automatically drawing from merchants' sales histories to make quick decisions about whether or not to extend a loan and what interest rates they ought to charge. Borrowers go through very little effort to fill out loan applications, and the companies are able to make informed and fast decisions.
Banks have access to a treasure trove of small-business customer data, including transaction histories and credit card statements. This information is far more comprehensive than anything PayPal and Alibaba are able to access through their platforms. Banks that make full use of the data they already have will be able to go beyond credit scores to gain deep insight into potential borrowers' financial situations. Automatically analyzing data to set interest rates and provide approvals would be a big draw for customers eager for a quick turnaround as well — especially if banks effectively market these advantages to their current customers.
Play the middleman to fend off competitors
Matching the offerings of PayPal, Alibaba and Square won't be enough. Banks need to find ways to get ahead of these aggressive competitors in order to regain their dominance in the small-business lending field. Taking a cue from successful peer-to-peer companies like Funding Circle and Lending Club — which use the mechanics of crowd-funding to play middleman between small-business borrowers and individual or groups of investors — could be one possibility. Banks already have large networks of potential investors through their wealth management and consumer businesses. If they were to leverage these networks to create their own peer-to-peer small-business lending platforms, they would be able to dictate the terms for a greater proportion of loans and start gaining control over the business lending space in the same way Apple and Google control the app ecosystem.
So far, PayPal, Alibaba and Square have done a very effective job of integrating their lending programs into their platforms. The more users these platforms gain, the larger their potential borrower bases grow. And if they continue to use in-platform resources effectively to market loans with reasonable interest rates, busy small business owners might not even bother to look elsewhere for a loan.
But banks have the platforms, data and wide reach to enjoy similar advantages. They should use these resources to offer small-business borrowers a quick, hassle-free application process that they can complete right on their banks' websites. Of course, learning to use those resources properly will take time. Banks need to get started now.
Greg Weddell is the small business practice manager at Yodlee, the digital financial platform. In addition to his work with Yodlee, he has 25 years of experience serving in executive positions for major and regional American banks.