Online lending is all about speed. At least it's supposed to be.
These companies feature easy-to-use loan application pages and data-driven approval processes, but there is one speed bump they have not been able to overcome: the long-in-the-tooth U.S. payment system.
Typically, online loans are funded over the automated clearing house network, a process that can take as little as one day or as many as four or five if weekends and holidays intervene. That is a problem if you are selling speed.
So online lenders, sometimes known as alternative lenders or marketplace lenders, are enthusiastic about plans to enable same-day processing of electronic payments starting in September 2016.
[Coming this November: Marketplace Lending + Investing. Hear how participants in this fast-growth niche are using data and technology to propel lending into the 21st century.]
"We're pretty excited about that," said Douglas Merrill, chief executive of ZestFinance, which offers $3,000-$5,000 consumer loans over the Internet.
His firm's website states that customers will receive their funds via direct deposit within two business days. Merrill said in an interview that borrowers usually get their money the next morning. But he added: "We would like it to be faster."
Under a plan approved by banks and credit unions earlier this year, U.S. companies will be able to make same-day payments over the ACH network starting next fall. Initially, the speedier payments will only be available for transactions in which the sender pushes money to the recipient.
Some of the biggest beneficiaries will be online lenders, said Jay Bhattacharya, CEO of Zipmark, which enables digital payments for businesses. Some online lenders currently allow customers to access their money more quickly via a wire transfer, but that process is more expensive, he said.
Fundation, which offers small-business loans of $20,000 to $500,000, is one of the firms that wire loan proceeds to its customers' bank accounts. "It is costly," said CEO Sam Graziano. "Over time, we might reconsider how much of that we're going to do."
Asked about same-day delivery of payments over the ACH network, Graziano said: "I think that would dramatically reduce our cost."
For marketplace lenders that also make regular payments to loan investors, there should be additional benefits. Funding Circle, an online marketplace for small-business loans, sends monthly payments to the accredited and institutional investors who fund its loans.
Sam Hodges, the firm's U.S. managing director, said that same-day payments will be a boon for investors on Funding Circle's platform. Not only will they receive their money sooner, they will also get a faster understanding of how well their investments are performing. "I think it's definitely going to benefit the sector," he said.
Of course, the rapidly growing online lending business represents just a tiny fraction of the anticipated demand for same-day payments.
Early adopters of the upgraded system are likely to include payroll providers that want to get paychecks quickly into the hands of hourly and temporary employees, according to Janet Estep, president of Nacha, the industry group that oversees the ACH network.
Insurance companies looking to make fast payouts of claims and billers that want consumers to pay their bills swiftly are also expected to adopt same-day payments quickly, Estep said in an email.
But the rapid rise of the digital economy is breeding uses for fast payments that might not have been envisioned just a few years ago.
In 2012, banks rejected a plan to adopt same-day payments before reversing course earlier this year. In addition, the Federal Reserve has embarked on an ambitious collaboration with the private sector that aims to go much further than same-day payments, enabling the transfer of cash in something close to real time.
For online lenders, speed has been a key selling point to borrowers who need cash soon, and are willing to pay a higher interest rate in order to get it. But speed cuts both ways.
Eventually, the same-day system will allow online lenders to draw repayments from their borrowers more quickly. Those upgrades, for payments that are pulled from a bank account, are scheduled to take effect in September 2017.
Online lenders' reliance on automatic electronic repayments has drawn criticism from consumer advocates, who say that it prevents cash-strapped borrowers from making choices about how to allocate their limited funds.
Once the September 2017 changes take effect, online lenders will know more quickly if the repayments pulled from their borrowers' bank accounts have cleared, Graziano said.
That may hurt some borrowers, who are able to dodge fees as a result of the lag time that is part of today's system, but it should give the online lenders a more accurate daily picture of the health of their loan portfolios.