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Lending Briefing: SaaS SMB lending competition heats up as more fintechs enter the market

  • More fintechs are coming into the US market to offer banks solutions that digitize and streamline their SMB loan application and decisioning process.
  • As this segment of the market is drawing more interest, we sit down with Ranqx to delve into its strategy of scaling in the US market.
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Lending Briefing: SaaS SMB lending competition heats up as more fintechs enter the market

More SMB lending fintechs are entering the US market to partner with banks

Banks have never really catered to the small and medium sized business sector, and this gap is being increasingly recognized. More fintechs are coming into the US market to offer banks solutions that digitize and streamline their SMB loan application and decisioning process. 

Most traditional banks in the US don't have proper functionality set up for SMBs to easily open accounts or get loans – almost none have straight-through digital origination and decisioning on a small business loan. It still requires human input.

"Not one traditional US bank has the online capabilities to provide a straight-through small business loan application for either unsecured or secured loans with an instant decision or offer to the customer," a Deloitte report found.

Plus, even the banks that have enabled online account opening for small business customers have not invested beyond the account opening experience, leaving the door open to fintechs that provide additional capabilities.

While there are plenty of digital loan origination solutions out there, most of them consist of a digital workflow that allows for the uploading, collation and sharing of documentation with a banker or case manager.

A loan application process can take weeks and even months, but alternative lenders are able to shorten that to a matter of hours or even minutes by leveraging real-time data, as well as credit bureau, registry and financial information.

Considering this backdrop, one could argue that the US market is ripe for fintechs to bridge this gap. And competition here is heating up, with some fintechs coming in from across the ocean. 

This is the case at Ranqx, a New Zealand-based SMB lending fintech, which is entering the US market to offer straight-through digital origination and decisioning on small business loans to banks.

"We're saying to traditional banks and credit unions who have low cost of money but highly inefficient lending processes that we can make them highly efficient with a cost out solution that makes you look like a fintech," said Dave Lewis, Ranqx CEO.

In the US, other fintechs like Extend are also taking a similar approach – partnering with banks, innovating from within, focusing on the tech stack while letting the bank own the loans, customer relationships and distribution channels.

Who is Ranqx?

The fintech started in New Zealand, but that's a relatively small market – a country with around 5 million people and around 600,000 small businesses. Why are they going to North America?

"You don't build a fintech to scale it in New Zealand. You build a fintech to prove it in New Zealand, and then to scale it elsewhere," he said.

Ranqx's strategy is to focus on curated partnerships in the US. The first and most notable one is a distribution partnership with Visa, inked earlier this year. This is what informed the strategic decision to scale in the US, as Visa was constantly bumping into banks and credit unions who voiced their struggles with small business underwriting: it's complex, hard, and full of friction.

They've also got a global partnership with Mambu, the core banking engine originally out of Germany, but very much making inroads into the Americas. Ranqx doesn't compete with Mambu's core banking engine and the transaction engine – they're a small business lending vertical that sits on top of that white-label service for the bank or credit union.

Their model works with the bank or credit union to define which rules, policies, and scorecards they want to be in play for SMB credit underwriting, given that they are the balance sheet lender ultimately. Apart from using the bank's traditional data sets, they're also introducing alternative data sources to their banking partners, including cash flows and e-commerce data, among other things.

Ranqx is not focused on big ticket commercial loans that do require a banker to close and manage. It's the small and medium-sized economy that they're targeting, with working capital loans of $10,000 to $500,000+ that can help businesses with cash flow issues for funding productivity and growth.

"Those kinds of working capital solutions should be as frictionless as possible, both for the applicant and for the lender. When lending is brick-and-mortar and paper-based, the problem is that it takes hours, days, and weeks of time. That's what we've solved for, and that's why we think there's a big opportunity," Lewis told Tearsheet.

The company sells an API-first digital lending platform, so the loans don't go on their balance sheet. 

Taking the loans on your own balance sheet means that margins are squeezed given the higher cost of capital compared to traditional deposit-taking entities.

Going B2B solves the distribution and scaling problem that B2C SMB lending fintechs have been facing. Scaling profitably in the small business segment is tricky, because there are many types of verticals and businesses with a lot of different problems.

And considering that now we're in a high interest rate environment, B2C fintech lenders are expected to struggle the most. If you don't take deposits then you have a high cost of capital, and some fintech lenders are struggling to find buyers for their loans as investors demand higher yields.

Quote of the week 

What we're reading 

Payments fintechs are diversifying into lending

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Lending Works rebrands as Fluro to “squarely focus” on embedded lending

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Why embedded finance is critical to SMB lending

Chart of the week 

Source: Amount, Cornerstone Advisors

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