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Inside Wells Fargo’s plan to ‘disrupt the disruptors’

Like most aspects of banking, small business loans are no longer just about the financial agreement between the bank and the customer, but the personal attention that comes before and after the service. That’s a recurring theme among online lenders, but it’s also the view of Wells Fargo’s Lisa Stevens, president of western region regional banking.

Last year, the bank launched its own online lending product, FastFlex, in response to not only new competition from the likes of OnDeck Capital and Bond Street, but to its own customers asking for ease of access to loans, ease of use and guidance. Now it wants to open that product beyond Wells Fargo customers.

Based on the latest Community Reinvestment Act data released in 2016, Wells Fargo extended 473,847 loans and $21.3 billion in total loan originations under $1 million to U.S. small businesses that year. It is the top ranking U.S. small business lender by dollar amount.

Tearsheet caught up with Stevens about how Wells Fargo approaches small businesses and what competition from alternative lenders mean for the bank.

Wells Fargo is the number one SBA lender in dollars. What’s your focus?
It depends on customers, what their need is at the time. But our focus has been about being where our customers need to be and making it easy for them. The business encompasses a lot because it’s about trying to see things from perspective of a small business owner versus the perspective of the institution.

What’s the perspective of the institution, historically speaking?
From the 2008 recession to a couple years ago we knew diverse-segment small businesses were struggling more than they had prior to 2008. We did a study with Gallup to understand what are the pain points for Asian-, Hispanic-, African-, women- and veteran-owned businesses and what could we do to help revitalize these businesses at a faster rate.

What did you learn?
Small business owners know everything about their businesses but don’t necessarily know what they need to do to make sure they put all the right financial instruments and advice into place. We created four initiatives and one was to help with credit coaching.

What does that entail?
We call people that get declined and walk them through what happened, why they got declined and what they need to do to get approved. When small business owners they get declined for a line of credit or loan they often don’t know why. At the time we were the only financial institution to do something like this. FastFlex was also an answer to what some in the market were looking for.

How so?
It was that ability to control your inventory or be able to move quickly on something when you have an opportunity and you need to get credit quickly. With FastFlex, we came together and made the decision to basically disrupt the disruptors, create a product we knew would be competitive and easy access for our customers with the capabilities we had. But we did it fast. We’ve got more piloting the line of credit right now. Now we’re looking to offer Fast Flex to new customers who don’t have a history with us.

Is your business threatened by online lenders?
It’s a competitive market but thats a good thing for small businesses. All the online products that have come out have been a positive thing for small business owners because it’s given them more choices and opportunities. And it’s allowed us to sit back and rethink how we’re creating the best tools and advice.

What about Amazon?
Companies like Amazon, Zappos — they’re all fantastic opportunities for us to understand what’s the experience we should be creating for the business owner or customers and to be able to learn from others innovating.

How do you measure success?
There are financial metrics, the number of customers we’re reaching, how we continue to innovate and be responsive to a world that’s changing so quickly. We also have surveys based on what our customers are saying. The anecdotal success is just as important.

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One year in: How JPMorgan is transforming small-business lending

For JPMorgan Chase, small business is big. The bank is the third top lender of Small Business Administration loans by unit in the U.S.

As of May, Chase approved 2,375 loans in 2017 for a total $679 million. But beyond SBA loans, the bank also extended more than $24 billion in credit to 4 million small business customers in 2016 through its business banking, Ink from Chase credit card and commercial term lending. In each of the last four years, it’s extended more than $19 billion in new small business loans.

It’s a market not without its pressures. After the recession, the largest U.S. banks, Chase itself included, halted most of their small business lending, later creating the opportunity for online lenders to enter the market — like Bond Street or OnDeck. Last year, JPMorgan began using OnDeck’s technology for its Chase Business Quick Capital product, a  short-term, quickly funded small business loan. It was one of the first banks to embrace a partnership-type relationship with a fintech startup, at a time when the industry narrative still focused on startups’ potential to displace banks.

“When we think about strategy and product we are very focused on customer experience. If there isn’t a problem worth solving we shouldn’t be in that space. We really wanted to provide a simple and fast experience for our customers to access capital when they needed it,” said Julie Kimmerling, head of Chase Business Quick Capital and a senior manager on the business banking strategy and business development team.

Tearsheet caught up with Kimmerling about small business lending in a digital age and the OnDeck partnership. The following has been edited for length and clarity.

In your six years at Chase, how has small business lending changed?
There is a tremendous amount of data available on customers that is also becoming increasingly digitized and simultaneously, theres a lot more computing power available. Our ability to use that data that’s becoming more centralized has allowed us to think about how you envision credit in a different way. A lot of that has occurred over the last 10 years or so.

Small business lending isn’t alone there.
Lending has benefited, payments has benefited — even more generally, banking services and wealth management have benefited. Retail disruptors like Apple or Amazon have fundamentally changed the way people interact with digital experiences and tech. Consumers and small business owners have basically been able to demand different outcomes from their banks and lenders.

Did that help create the opportunity for lending startups?
All of that together was a perfect storm for a lot of online lenders. [Customers] were demanding changes to the way they experienced banking, and we had to change with those trends. It makes a lot of sense that Chase came into the online lending space — we even went a couple steps beyond what some of the fintechs have done. We have a simpler experience.

You began using OnDeck’s technology a little over a year ago. How’s it going?
We’re pleased with the simplified customer experience we are able to offer our customers with Chase Business Quick Capital. Additionally, our experience with it has also given us tons of ideas of how we can leverage our experience here to make more of our lending products even faster and even simpler. We took a problem that was incredibly difficult with a tremendous amount of process associated with it — universally across the industry it was a difficult customer experience — and we turned it into something that was easy to use.

How fast and simple are we talking?
We’ve provided our small business customers with a process that enables them to access credit when they need it. By using data from their existing relationship with us we’re able to pre-score them. When they actually apply for the loan they click through six screens and are able to check out the loan. We can fund the proceeds of the loan into their account the same business day. In the past it could take weeks if not over a month for decisioning and we’ve taken that down to near real time decisioning. They don’t have to submit any additional documentation.

Are those elevated consumer expectations starting to translate to your small business customers?
Every single small business owner is a consumer. Everything that affects the retail space is already a shared demand for our small business owner. In lending we think of ourselves as being near the forefront. With Chase for Business, we’re trying to pioneer the easiest banking experience across multiple areas.

The legacy-startup dynamic has changed in the last three years. OnDeck aside, do you feel Chase competes with the startups?
“Us versus them” is not the perspective JPMorgan Chase takes. In some cases we’ll still determine we’re best positioned to develop the technology ourselves. It’s no secret how much we spend on tech.

How about one of the other technology or retail disruptors?
The narrative is about where it makes business sense. We will absolutely think about being partners and working together instead of always having this narrative of “us versus them.” We always evaluate our path forward based on the use case and determine if we should buy, build or partner.

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Is PayPal the U.S. answer to Alipay?

The U.S. may not have an exact answer to Alibaba Group’s Alipay, China’s dominant third-party online payment platform, but PayPal is certainly starting to look like it.

Both provide online payment capabilities to merchants and consumers. Both are using data from their existing customers to offer consumer credit and small business loan options. Now, PayPal is catching up to Alipay in that it’s starting to get into consumer-to-business mobile payments and working to become more than the yellow button on your business’ website, as Amit Mathradas, general manager of small business at PayPal, puts it. It wants its products, partners and consumer and merchant clients to come together in a more comprehensive way.

“PayPal is growing with the merchant and taking a lot of direct input and feedback from our businesses,” Mathradas said. “We’re working hand in hand to help develop solutions so they can focus on running their business while we handle the fintech.”

So far this year, PayPal has announced that customers will soon be able to buy things at physical shops with their PayPal balances through Android Pay, that it will extend a pay-with-Venmo option to PayPal accepting merchants by the end of the year and closed a huge deal with TIO that will bring 10,000 billers into the PayPal network. Last week, it revealed its latest offering, PayPal Business in a Box, in partnership with e-commerce platform WooCommerce and accounting software company Xero.

That’s a lot of new data to be working with on top of what PayPal already has: 16 million merchant and 203 million consumer accounts. And with all these new agreements bringing even more customers into the network, PayPal can, like Alipay (now officially Ant Financial) use the customer data from those transactions to give consumers and merchants access to other financial services that look a lot like typical core banking products.

“The transaction volume you take part in using your PayPal account helps qualifying you towards our Working Capital product,” which offers small business loans backed by WebBank, Mathradas said.

PayPal Working Capital has provided $3 billion in loans and cash advances to 115,000 businesses since its 2013 launch.

Mathradas said while PayPal’s merchants had long considered it an important payments partner, they had been asking for things like access to cash and consumer credit to help drive increase in online store conversion. When merchants sign up for Business in a Box, they’re automatically registered for a PayPal business account that integrates into its WooCommerce store and Xero account with application programming interfaces.

There are 28 million small businesses in the U.S. that account for 54 percent of all of U.S. sales, according to the 2016 U.S. Small Business Profile by the SBA Office of Advocacy, and Xero has those in its sights.

“We’re going to change the game for small businesses because they make our economy go round and round, said Herman Man, Xero’s head of product for the Americas. “When it comes to their ability to monitor financial performance, real time is crucial to their survival.”

Mathradas declined to comment on PayPal’s threat to traditional banks.

“The one thing we do offer is an end to end solution. We can serve merchants or consumers that want be paid online, at a trade store, at a store, that need working capital, that need credit. One-stop shop is what separates us from anyone else out there. We’re going to continue using these assets to grow.”

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How Ant Financial is transforming the Chinese payments industry

Alibaba’s financial affiliate group is reaching out to the under-banked in China.

Alibaba’s Ant Financial Services Group has brought people with low income and limited to no credit history onto the financial grid by incorporating digital payments into existing e-commerce and social media platforms — a feat by any standards, especially as other markets, like the U.S., lag behind.

By using the customer data from those transactions, Ant has been able to give them access to other financial services its created that look a lot like typical core banking products — savings accounts, credit assessment and loans for consumers and small businesses — according to a report released Wednesday by the United Nations Better Than Cash Alliance.

“That Ant Financial is now able to analyze all that data and leverage the platform to extend loans to companies or individuals has had a big impact on how they produce new businesses,” said Camilo Tellez, head of research for Better Than Cash Alliance and the lead author of the report.

Ant Financial has basically found a way to scale financial access and wellness tools similar to existing apps in the U.S. either struggling to take hold or not really integrating with the other existing offerings – like the savings app Digit or micro investing app Acorns. But U.S. customers still largely pay with plastic, whereas mobile payments are so big in China that Ant can use transactional and other alternative data to create a true financial ecosystem. Friction around customer data is one of the biggest things in the U.S. keeping financial services siloed.

Ant Financial launched in 2014 and as of September 2016 had loaned $107.3 billion in loans to more than four million small businesses over its Alipay platform to date, according to the UN report. Grameen Bank, the Nobel Peace Prize-winning microfinance organization and community development bank, has lent $17 billion since its inception in 1976.

In China, 79 percent of adults have had a bank account at some point, according to the UN research, but only 10 percent of them have borrowed in the formal financial system and for them, their digital footprint of transactional data and payment behavior can add to their credit histories. The same is true of small businesses, which historically have had difficulty accessing credit or taking out loans because China’s major banks are so heavily focused on lending to state-owned enterprises. Sesame Credit, Ant’s social credit scoring system, now has more than 350 million registered users and 37 million small businesses that buy and sell on Alibaba Group marketplaces. Sesame examines customers’ credit history, financial behavior, contractual capacity, identity and users’ social networks.

There are also accessible ways for people to save and invest their money. Alibaba’s Yu’e bao lets customers invest the money “left behind” on digital wallets into a money market fund, earn interest on that spare change daily and still have the freedom to withdraw the funds when they want. Alipay effectively acts as a fund manager but is treated as a distribution service from a regulatory perspective. Customers can also use Yu’e bao funds to make e-commerce purchases. Yu’e bao, which now serves more than 152 million customers, grew its assets under management to $117 billion in 2016 from $29 million in 2013.

“You have all these different opportunities being created through these messaging platforms for younger entrepreneurs for small and medium sized enterprises,” Tellez said. “Hopefully some of that impact will be found in other markets and similarly be able to provide SMEs better access to capital.”

In China, merchants are required to accept mobile payments — each point-of-sale terminal needs to have near field communication technology built in — so they’re more accessible, user friendly and more people can take advantage of the opportunity, which allows more data to enter and flow through the system.

The closest thing to a social payments platform in the U.S. is Venmo, which stops at peer-to-peer money transfers. But Tellez says he sees Venmo 2.0 bringing the money transfer capability to merchants. While the U.S. has so far missed out on a lot of mobile payments opportunity the China has been using to the advantage of its financially excluded consumers, it’s possible merchant partnerships with Venmo or something like it could be how we actually start integrating mobile payments.

“As companies are leveraging more data analysis and they start looking at how to integrate wallet functionality into everyday activities, the wallets will become like silent pipes through which payments move,” he said. “We’ll see more partnerships happening where you don’t even recognize that you’re using Venmo to pay for things, it’ll be more seamless.”

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Transparency remains a sticking point for online lenders

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.”

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Dave Robertson of Treasury Strategies on how companies are improving transparency into financial risk exposure

online lending

I had the opportunity to pick the brain of Dave Robertson, a partner at Treasury Strategies.  His firm has a unique vantage point from which to spin today’s story:  Companies as diverse as PepsiCo, New York University, Merrill Lynch and Idaho Power have worked with Treasury Strategies to manage their treasury, payments, and cash.  They take over 25 years of experienced know-how to address issues like optimized liquidity and risk management, global banking structures and FX strategy, and help their clients choose and integrate technological solutions like online trading platforms, debt and investment systems and SWIFT.

Dave Robertson, Treasury Strategies
Dave Robertson, Treasury Strategies

What do treasury challenges in today’s banking environment look like?  How does technology play a role?

Companies want improved transparency into financial risk exposures – credit, FX, liquidity – this in turn is causing companies to focus on improved technology and integration with their banks. We see many of our clients adopting SWIFT standards, working to find banks with strong information capabilities and near real-time reporting, with full detail and they are integrating and automating downstream financial and risk management practices (such as cash flow monitoring / forecast, FX exposure estimation, monitoring and management).

Can you give us an example of a recent project?

In the corporate sector, we assisted a Fortune 500 firm in adopting a combination of SWIFT and Treasury Technology to improve the management of cash and financial risk across multiple subsidiaries around the globe.  In the financial sector, we helped a super-regional bank evaluate the FinTech space, analyzing where and how they can play in the market. This work is helping them drive their new business roadmap and also helping them evaluate acquisitions to accelerate growth and acquire new assets.

There are a lot of new sources of capital, particularly in small business lending. It’s coming from pureplay lenders, but also from e-commerce companies, like PayPal and Amazon. Will regulators push upstart financial service firms to take more traditional sources of funding? If so, how does this all play out?

We see the regulators as not yet holding non-banks to the same standards as banks. The CFPB (Consumer Financial Protection Board) is now beginning to look into these services more seriously. However, there isn’t the same level of scrutiny as banks unless the firm is a SIFI (a strategically important financial institution – e.g., one whose failure would have a contagion or other effect on the markets).  There are multiple standards (global, domestic) and most are banks, but it also includes non-banks like AMEX or Met Life.

On the other hand, the regulators want to see more cash flow lending – lending within the repayment means of consumers and small business – so the new lending services like Square are very appealing because they are essentially pure cash flow advancement schemes. Some of the new schemes around using social media data could have inadvertent discriminatory practices, so it will be interesting to see how regulators view these approaches.

I’m not sure we see the regulators looking at the funding sources too closely – it’s interesting because one root cause of the financial crisis was the concept that entities were underwriting mortgages and then packaging them and not taking on any exposure – so there was no ownership of the risks. Yet many alternative lenders are using this same model – it’s not to say that this model is wrong, but it’s interesting in that we don’t see the regulators raising any alarms.

Some of today’s largest tech firms are sitting on mountains of cash. Why? How does this change the role of treasury?

The mountains of cash are pure economics – there is almost no opportunity cost of sitting on the cash. You may recall, when rates were high, arbitragers like Carl Icahn would take over companies that had excess cash. In today’s market, holding excess cash has minimal economic consequences, yet this liquidity provides incredible strategic flexibility for investment / acquisition. So you have all of the upside of liquidity with none of the market discipline of opportunity cost. Within a 4% environment, shareholders would demand that this cash be productive. Treasury Strategies conducts deposit strategies for banks and we see that much of the liquidity on balance sheets today is a function of the unusual rate and money supply environment. Should we see a rise in rates (or normalization of M1, M2 levels) we would likely see a significant reduction in corporate cash.

I’m not sure that this changes Treasury’s role – but with rates expected to rise, every Treasurer needs to think about these opportunity costs and have strategies to ensure cash is productive and that capital structure and cash levels are appropriate.