What JPMorgan's latest moves reveal about online lending's future

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U.S. banks have long used automation to preapprove consumers for their credit cards. Now JPMorgan Chase is taking the same concept and applying it to online small-business loans of up to $200,000.

The idea of computerizing small-business lending decisions is not new, of course; digital lenders like Kabbage and OnDeck Capital have been in that business for roughly a decade. Nor are customized preapprovals a breakthrough; PayPal and Square make similar loan offers to their small-business customers.

Still, Chase’s recent decision to commit to this business by extending a trial run that it conducted with OnDeck marks a key moment in the evolution of U.S. digital lending.

That is not only because other banks are likely to follow Chase’s lead. Indeed, Wells Fargo already offers a similar online small-business loan product. Nor is it solely because of Chase’s vast size; the New York megabank has more than 4 million small-business customers.

Chase’s move is also important because it augurs the development of a two-tier market for borrowers who want fast access to cash.

Customers who are sufficiently creditworthy will likely be able to get funds quickly from a bank, and they will probably pay comparatively low interest rates. Meanwhile, shakier customers will likely continue to turn to websites operated by nonbanks that offer more expensive credit.

JPMorgan Chase CEO Jamie Dimon bolstered this theory in a recent interview with Crain’s Chicago Business. “Remember, there is nothing online lenders can do that we can’t,” Dimon said.

“There are reasons there are certain things we won’t do that others will,” the 61-year-old CEO added. “Sometimes the loans are too small, the credit [risk is] too high, the regulators don’t like it.”

Chase began offering online small-business loans 16 months ago under a pilot project with New York-based OnDeck. The companies announced a four-year extension of that partnership on Monday. The product is branded as Chase Business Quick Capital.

“The pilot was incredibly successful from the standpoint of improving customer experience dramatically,” Julie Kimmerling, head of the Quick Capital product, said in an interview. “As well, we were seeing more efficiency in our operations.”

Under the deal, Chase is responsible for underwriting and marketing the product, a small-business term loan of up to 24 months that the bank holds on its balance sheet. OnDeck provides technology and services the loans.

Applicants apply online, get a decision almost immediately, and can receive their funds as soon as the same day. Loan payments are withdrawn automatically from borrowers’ accounts. “That replaces a process that takes a lot longer and has historically been branch-based,” said OnDeck CEO Noah Breslow.

Because preapproval offers are only being sent to existing Chase customers, the bank has access to a broad range of data that sheds light on applicants’ finances. The loans carry annual percentage rates of 9% to 25% — higher than traditional small-business loans from banks, but lower than what is available from many online lenders.
Chase has not disclosed how much money it has lent so far under the Quick Capital program, or the default rates on those loans. But Kimmerling said that loan volume is in line with the bank’s expectations, and loan performance has been very positive.

Chase said in a press release Monday that it intends to continue refining the Quick Capital product, and that it will expand access to the loans in 2018.

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