Transparency is the big sticking point when it comes to why small businesses still prefer banks to online lenders.
A small business credit survey by the Federal Reserve Bank of New York found 46 percent customer satisfaction at online lenders like Lending Club and OnDeck Capital with a 19 percent rate of dissatisfied customers – compared with large banks’ 61 percent of customers who indicated they were satisfied with their small business loan process and 15 percent of whom expressed dissatisfaction. Almost half of all customers specified that their dissatisfaction came from a “lack of transparency.”
Rohit Arora, CEO of Biz2Credit, an online small business platform that matches entrepreneurs with credit solutions, said online lending solutions can be a little misleading. They’re good solutions for customers whose expectations have been raised by expediency of the digitized commerce sector, but the reality is that banks’ core functions are still in the dark ages, he said.
“Large banks and small banks still haven’t gone online,” Arora said. “You can’t go and get $200,000 from your bank – that can take you four to six weeks. In other sectors, convenience and price go in tandem, in financial services, convenience comes at a cost. That’s when the higher dissatisfaction level comes into the picture.”
Jeremy Ruch, Bond Street head of business advisory, said that transparency around pricing and profits is generally the sticking point. Customers of other alternative lending products aren’t perfectly clear on what the requirements of their loan products are, how they qualify or why they don’t or what exactly they’re paying for, he said, although he maintained that Bond Street receives mostly positive feedback about the transparency of its loan process.
“Transparency is obviously incredibly important to us,” he said. “It’s for that reason that we make a point of actually highlighting the interest rate to our customers before they sign up. It’s about being completely open about all elements of our process and clear about what they’re signing up for before they do it.”
Online lending customers are also dissatisfied with higher interest rates and unfavorable repayment terms, two common issues for the growing industry, which continues to have a higher cost of capital and for customer acquisitions.
Those issues are also what’s driving bank-fintech partnerships like the agreement between On Deck Capital and JPMorgan Chase, which is trying to grow its small business loans aggressively. Plus, online lenders target riskier businesses that probably couldn’t get credit from a bank.
Arora said a big challenge for online lenders is simply that they haven’t spent the time or money to build comparison-type dashboards that would help customers understand exactly what they’re getting.
“A lot of online lenders are failing. They’re catering to a larger proportion of customers now compared to banks – not in terms of dollar value but in terms of units. And customers need more education, you have to explain to them why you’re charging a higher rate.”