Earlier in 2019, Equifax acquired Paynet, a company that provides commercial credit risk underwriting to online and alternative finance lenders, and commercial finance and leasing companies in the U.S.
Bill Phelan is the co-founder of PayNet and is now the svp and general manager of Equifax Commercial Solutions. The combined entity now covers about 30 million US private businesses and about $4 trillion worth of capital.
Bill joins us on the podcast to talk about the intended synergies of bringing together Equifax’s data with PayNet’s. We then discuss what’s driving the growth in non bank lenders targeting SMBs and how small banks are investing in tech to take share back. We also cover some of the nuances of digital lending, like how it’s more inclusive for minorities, women and rural borrowers.
The PayNet story
When I founded PayNet in 2000, the commercial credit market didn’t work very well in the US. When you look at history, commercial credit is associated with wealth. You had the Medicis, the Bank of England, and the rise of American power through capital markets — credit has always been associated with wealth. Small companies — farmers, small trucking companies, metal benders — struggle with access to capital
I founded PayNet to fix this issue. We built it up to be one of the largest credit databases in the country, covering 24 million businesses and rated the credit for around $2 trillion of capital. With PayNet information, lenders could make credit decisions faster and with more confidence. In 2019, we merged with Equifax.
The combined Equifax and PayNet
At the time, we were doing really well as a private company. We were growing nicely, had good partnerships, and an expanding client base. We first partnered with Equifax and what we found was that 1+1 =3 with the database. PayNet covered $2 trillion worth of term loans and mortgages and in the Equifax database there was about $1.6 trillion of short term loans like for credit cards. There really wasn’t a lot of overlap.
The combination of both databases provided a better picture of privately-held businesses. We have information on all the 30 million private businesses in the US and provide insights into about $4 trillion of capital. The digital asset is the crown jewel of the combination because it makes our clients’ lives easier.
Better serving US lenders
We find that our current customers benefit from avoiding multiple vendor management processes. It can be very drawn out, so by combining together we only have to go through one vendor management process. Our hit rates are also going up — they’ve improved by 4 to 8 percent, giving our clients a better chance of finding what they’re looking for. Lastly, putting together short term debt with long term debt creates a comprehensive view of the borrower, resulting in a better view of the credit profile of a small business.
Behind the growth in non-bank SMB lenders
At best, it takes a small business about 45 days to get a loan from a bank. You have to provide five years of financials and present tax returns. It results in a mound of paperwork and it’s an expensive process for both lender and borrower.
Fintechs enable businesses to access more capital. The speed of access to capital is an important piece of the success formula for business. They also reduce the reams of paperwork. It’s not a perfect system but it’s a step in the right direction to fixing the broken credit market for small businesses.
How banks compete in today’s SMB lending market
Banks are waking up to the fact that SMBs are their core market. They are looking at new technology now. For example, we just invested in technology for financial statement collection. Tech is a game changer — we can pull financial statements electronically from a business owner. Something that can take weeks we can now get done in 24 hours. Community banks are starting to use this type of software to digitize financial statements upfront instead of getting paper-based statements and type them into a database.
Digital lending’s inclusivity
You can fill out an application online. It generally only takes six to eight data points to apply. Then the system can access data sources. With PayNet, we link into these electronic application systems. The computer is blind to whoever is filling out the application. It’s just empirical data.
Access to capital in low income areas for businesses is limited by the fact that there aren’t capabilities to serve that market. Technology, data and analytics can be used to serve a rural market. The computers are agnostic — they just want to do their jobs and assemble a credit file quickly.