Kabbage's home-grown technology automates the lending process and gleans insights from social media and shipping data.
Latest breakthrough: Use of social media analytics in credit decisions.
Online lender Kabbage has a unique business model. The three-year-old Atlanta company provides credit to small online merchants based on analyses of their receivables, shipping and social media activity. The company has 15,000 customers and recently advanced its 10 millionth dollar. Its costs are low as its processes are all automated.
Small businesses authorize the online marketplaces at which they sell (such as eBay) to share data about their sales with Kabbage; they also authorize PayPal to share information about and access to their PayPal account. An automated decision engine crunches the numbers and if the business qualifies, Kabbage puts cash in an amount ranging from $500 to $40,000 in the PayPal account. In addition to PayPal, Kabbage also uses the automated clearinghouse to handle payments for customers who sell on Amazon.
According to the company, small online businesses can receive working capital within 10 minutes. Kabbage has extended $14 million to more than 4,000 small businesses.
A recent deal with UPS lets its customers grant UPS permission to share shipping data with Kabbage. So far, more than 20% of UPS customers have opted in. "We're trying to understand how shipping details relate to their overall business," says Robert Frohwein, CEO of the Atlanta-based firm. If somebody has an eBay account associated with their Kabbage account, and can see they shipped 500 packages via UPS, we look at their sales and see there are some not attributed to eBay. It also helps from an identity perspective, it's another way decrease the risk of fraud on our system, having that extra identity check." Other data sources include marketplaces, payment accounts, accounting programs, ecommerce software and social data.
The company is incorporating social media activity into its analysis now, Frohwein says. "We allow our customers to associate their Twitter and Facebook accounts. As our theory goes, the more active you are at keeping in touch, gaining followers, and responding to them, the more likely you're running a solid, growing business and you're worth an additional risk. Or there's less risk associated with you so we can provide more cash or at a lower rate."
Kabbage is also looking at sentiment analysis - whether people are saying good or bad things about a company or more generally inquiring about its products and services. "Based on that data, we're giving them access to incrementally more cash, so by getting active on social networks and by interacting with your customers, you can help your business grow, get access to additional capital," Frohwein says. "We won't give you cash solely based on your activity on social networks, but we will give you access to more cash."
Kabbage also will provide more capital to customers who "like" Kabbage on Facebook or refer Facebook friends to the service.
Contrary to what was reported in a BusinessWeek profile, the company does not consider customers' game scores in its analyses.
The decision software has all been built in house using .net and thirty of the company's 50 employees are developers. "We're growing fast and hiring largely in the technical area," Frohwein says. "We think of ourselves as a technology company. We happen to provide capital, but we do it thanks to technology enablement."
The software creates a score on a scale of 0 to 1000 that takes into account qualitative and quantitative elements. "We try to build a 360-degree view of that business, everything from the transaction, what people are saying about them, how they're leveraging social networks, how they ship their products, how they pay and get paid," Frohwein says. "All those elements go into a comprehensive model and out of that we determine a score that helps us determine relative pricing and how much cash we're going to make available to them."
Ultimately, Kabbage will share the score with the user. "The idea is, they should have the opportunity to grow their business and grow their score and by doing so, get access to more cash," he says. "The other thing we want to do is enable third parties that also want to reach this audience, that don't have any effective way to reach them or understand the risk associated with the risk of doing business with them, access to the data." A customer might want his insurance company, a supplier, or even customers to have access to the data to help inform decisions about the company.
Although the company is not profitable yet, "we could be profitable tomorrow," Frohwein says. "Our business is large and most of the people working here are working on improvements to the system and we're absorbing some losses." Changing the strategy to focus on profitability is a simple decision, he says.
Gallery: The 2011 Innovators of the Year
Articles on honorees:
• Brett King: A Vision for 'Frictionless' Banking
• Jose Olalla: Pioneer in the Public Cloud
• Jeff Dennes: A Granting of Grace
• Howie Wu: Getting New Members Quickly on Board
• Susan Andrews: Drawing the Best Ideas Out of 263,000 People
• Shekar Pannala: Aware of the Context
• Frank Eliason: Taking Social Media to a Chattier Level
• Harry Gunsallus: Speeding Apps to Market
• Jim Smith: A Plethora of Online Banking Options