Fintech innovations seem to be predicated on unbundling and rebundling, starting from scratch or working with traditional systems. This dichotomy is particularly clear in credit scoring, which has seen fintech pushes for two distinct, opposing tracks of innovation.
On the one hand, some alt lenders and credit scorers are coming up with their own alternative credit scoring algorithms based on big data from monthly rent, electric, or cable bill payments, or even court filings and criminal convictions. For the underbanked and unbanked, these algorithms are what make it possible to get a loan for their small businesses.
On the other hand, many alt lenders still rely primarily on traditional credit scores, and certain fintechs are innovating by trying to simplify the credit scoring process for SMB owners.
One such fintech is Nav, a business credit and lender marketplace company. Nav is fully aware of the alternative credit scoring movement. “The one misconception about scoring and lending is that it’s easy to come up with a better mousetrap,” said Gerri Detweiler, head of market innovation at Nav.
However, when it comes down to it, the company doesn’t believe these new datasets are going to replace traditional credit scoring overnight. “When you go out to look at alternative data sets, it takes time to monitor that data and compare that to the behaviors of the customer sets,” Detweiler explained. “So it’ll take time to determine what’s really predictive and what’s not so useful.”
A 2013 McKinsey report largely supports this approach to alternative credit scoring, noting that “many practitioners are not yet skilled in these [data sets] and are unfamiliar with aggregating diverse and oblique data to derive meaningful insights.”
Instead of trying to invent the wheel, Nav’s online offering is part educational, part matchmaker. The company aims to help the 160,000-plus business owners registered on its platform overcome any credit score fears they may have by making their personal and business credit scores clear to them, and by providing them with tools to improve their credit scores.
Nav isn’t a lender itself. It has over 100 lenders on its platform, with its own MatchFactor technology that predicts the likelihood of a business being able to get financing from a lender. “If [an SMB owner] is more likely to get approved, it’s a better experience for them, and the lender is happier, because they’re not wasting time on someone who’s likely to be approved,” said Detweiler.
However, while financial education may be at the heart of Nav, the company is trying to make this education as unintrusive as possible. “We understand that SMB owners are very busy. And in the end, they don’t need, or necessarily want, to be credit experts,” Detweiler noted.
This is, of course, one reason why SMB owners might turn to one-stop-shop alt lenders with their own credit scoring algorithms. But for SMB owners who are interested in getting started or building an existing business within the existing credit score system, online companies like Nav are trying to make that simple and attainable.
If you want to win small business banking, you have to address cash flow: 60% of small businesses in the US face cash flow problems on a monthly basis, according to a 2012 whitepaper by Barlow Research Associates.
Cash flow is a major problem, not just for incumbents and their frantic SMB customers, but for the American economy at large. According to an SBA report, SMBs really are the backbone of the American workforce: they employ 49% of the US population (that’s 120 million people), create 64% of net new jobs in the US, and account for 43% of US payroll dollars.
Wells Fargo has been taking steps to help small businesses get a grip on their finances. To do so, the bank, which has 3 million small business clients and provides more loans to SMBs than any other bank in America, established the Wells Fargo Works for Small Businesses resource portal in 2014.
Barlow’s whitepaper showed that one of the main problems keeping SMBs in perpetual cash flow pandemonium is a lack of integration between banking services and accounting. Enter Xero, an accounting software and online booking company, whose new data-sharing integration with Wells Fargo should provide a simple integrated solution to joint customers of the firms.
Standardization brought them together
The US banking system is leaning more heavily on banking APIs – a set of routine definitions, protocols, and tools for building software and applications. Both startups and incumbents benefit greatly from them, using these software hooks to create holistic experiences to meet their customers’ needs. Unsurprisingly, financial companies of all sizes have begun to put aside their differences to aggressively pursue API standardization.
“Its about how we create a world where data and details can transfer more securely and more seamlessly,” says James Maiocco, General Manager of Xero.
Together, banks and fintech startups are trying to develop a balance between giving customers control over their data, while remaining within the boundaries of security, privacy, and regulatory frameworks. It was at several different conferences about banking APIs that Wells Fargo and Xero started flirting with the idea of an API-driven integration.
Moving Fast
The conversation about creating an integration for joint Wells Fargo and Xero customers started several quarters ago. However, the actual development of the integration only took six months from start to finish.
Each company had an executive sponsor – Maiocco for Xero and Brett Pitts, Head of Digital for Wells Fargo Virtual Channels – as well as respective technology and business teams that had to work through the terms. Ultimately, the negotiations were dependent upon “a small handful of people on both sides of the table,” says Maiocco. He credits API standards as enabling such small teams to pull off such a big deal:
That’s the beauty of standards. You’re not building something custom for an individual organization, you’re actually gravitating around a standard that can be used by everybody. It doesn’t require large teams, it just requires an agreement around the standards and the commercial relationships of both parties.
Marketing the integration to their client base
Even if their joint customers aren’t all caught up with both firms’ press releases (as Maiocco notes, small business owners are the busiest people on the planet), Xero will make them aware of this new integration by messaging about the service at login, as well as engaging in a certain amount of more traditional outbound marketing activities. Though he couldn’t speak to Wells Fargo’s practices, he assumes that they too will be focused on informing their customers of the integration through customized, personalized channels.
Neither Wells Fargo nor Xero are disclosing the exact number of how many joint customers they share, but Maiocco told Tradestreaming that Wells Fargo represents a double-digit percentage of their customer base in the US. Ultimately, customers have to actively choose to apply the integration.
Miraculously, everybody wins
In theory, it’s a chain reaction of good. The Wells Fargo/Xero integration enables customers to stop circling the cashflow whirlpool and start succeeding in business, potentially resulting in more revenue, jobs, and security. Wells Fargo wins, because it means less risks, less businesses defaulting on loans. Xero wins, because the SMBs continue to grow with them.
For Maiocco, one of the biggest winners are those unsung heroes, the accountants. Many small businesses with 25 employees or less outsource their bookkeeping. From experience servicing accountants, Xero learned that a lot of their time is spent doing rote tasks that could really be done with machine automation. With this new integration between Wells Fargo and Xero, accountants could save up to 2 to 4 hours per joint customer, depending on transaction volume.
This is not only significant for the SMB customers, who typically pay their accountants hundreds of dollars per hour, but for the accounts themselves, who can stop doing manual data entry and focus on higher added value services for their clients. Maiocco suspects that Xero’s accountant base will push more clients to Wells Fargo as a result of this integration.
“The average SMBbookkeeper and accountant will have somewhere between 50-100 small businesses that they manage,” he said. “If you can save 2 to 4 hours per business per month, that’s a lot of time saved.”
Funding Circle is a leader in a pack of new financial companies bringing increased scale and online convenience to the world of SMB lending. While traditional banks have shied away from expanding their credit operations, companies like Funding Circle have filled in the gaps, working closely with SMB borrowers to provide them needed credit, quickly and efficiently. Funding Circle has shown its intention to grow globally.
Tradestreaming sat down with Sam Hodges, co-founder of Funding Circle, USA, to get caught up on the company’s progress in light of a recent acquisition it made in Germany.
Why did you found Funding Circle?
Over the past few decades, banks have largely pulled out of small business lending due to tighter regulations and archaic credit models and technology that make it difficult for them to profitably underwrite small business loans. This has left millions of small business owners without access to the financing they need to grow – something I actually I experienced first-hand.
Sam Hodges, Funding Circle USA
Along with a few business partners, I owned a successful network of fitness businesses – but getting access to capital was a horrible experience. We had a great financial profile, strong personal guarantors, extensive experience and a profitable business. Yet, we could not secure a loan to purchase new equipment to expand. We talked to almost one hundred different lenders and were either turned down or offered terms that simply didn’t make sense. The irony was, when my co-founder and I were working on Wall Street, we saw bankers lining up around the corner to give out $100 million loans for higher-risk businesses. That’s when we realized the traditional banking system was broken, and we set out to build a better solution.
Why is Funding Circle better than current solutions? How do you think your firm differentiates itself from the numerous competitors popping up?
The traditional banking system is broken and restricted by legacy issues, and many online lenders are either expensive or incredibly transactional, relying solely on computers to make credit decisions. At Funding Circle, we think small businesses deserve better.
We are the world’s leading global marketplace for small business loans and have been built from the ground up to help small businesses secure the funding they need to grow. Using technology to cut out the middlemen who take advantage of information asymmetry, we connect supply directly with demand for a fraction of the cost.
Unlike other lenders, we take a customer-first approach to create an experience that is fast, simple and very transparent. We also believe businesses are more than their credit score, which is why we layer human underwriters with our innovative technology and proprietary data analytics to look at the full picture and better assess the creditworthiness of a loan. It takes just 10 minutes to apply for a loan, and businesses can get affording financing in less than 10 days.
Can you give us a feel for the progress you’ve made in the business over the past couple of years (quantify it)?
Our business, along with the marketplace lending industry, has experienced tremendous growth over the past couple of years. Since 2010, we’ve helped more than 12,000 small businesses across the world access $1.6 billion in financing to help them grow, hire more people and ultimately stimulate the economy. Globally, we’re currently originating ~$100 million per month, and have 43,000 individual and institutional investors active on the marketplace.
One thing I’m particularly excited about is a groundbreaking deal we announced a few weeks ago to help millions of businesses across Europe sidestep the outdated banking system and borrower directly from investors, too. Last month, we joined forces with Zencap (now operating as Funding Circle) – continental Europe’s leading marketplace for business loans – to create the first truly global marketplace lending platform. We now operate in Germany, Spain and the Netherlands, alongside our existing operations in the UK and US. The market opportunity across continental Europe is larger than both the UK and US markets combined, with more than €1 trillion of outstanding loans for small businesses.
On the partnerships side, last year in the UK we became the first marketplace to announce a formal referral partnership with Santander and have since announced a similar partnership with RBS. In the US, we’re in active talks with a wide range of banks and other lenders about how we can work together and are looking forward to announcing something soon.
Since launch, we have raised $273m in equity capital from the same investors that backed Facebook, Twitter, Airbnb and Wealthfront. And as of today, Funding Circle now has nearly 500 employees across the UK, the US and Continental Europe.
You just acquired Zencap which provides a foothold for further access into Europe. How do you think about international expansion?
Our vision for Funding Circle is as a global lending exchange, where business from all over the world come to find finance from an army of investors, big and small. Small businesses are underserved in most of parts of the world, and we believe our marketplace model can help millions of businesses and investors to get a better deal. At the moment, we are focusing all of our energy on building a successful business here in the UK, USA and Europe.
Who’s a typical borrower for Funding Cirlce? How about a typical investor?
Walk down Main Street in any American town, and you’ll see examples of our borrowers. They are restaurateurs, gas stations, medical clinics, construction firms and IT consultants. These are established businesses that have assets and cash flow to secure loans, and a legitimate plan for growth. More specifically, our borrowers have typically been in business for around ten years, have annual revenue of $2 million and employ about 10 people. On average, small businesses borrow $130,000 for 36 months and use their loan for expansion and growth.
On the investor side, we’ve seen really strong appetite for our loans from a wide range of investors of all shapes and sizes. In the US, our investors range from individual accredited investors and family offices to large global asset managers like Victory Park Capital and KLS. Looking forward, we’ll continue to see an evolution and diversification in our investor base as we look to continue to bring down our cost of capital to offer even better rates and products for our borrowers.
What are Funding Circle’s challenges in the near future? What are the industry’s challenges?
Education and awareness remains a key focus for our industry. The most powerful marketplaces bring together the largest number and diversity of participants across a breadth of products and geographies. Our goal is to be the leading global marketplace for the full gamut of small business loan products worldwide. As a company and an industry, though, we still have a way to go in terms of raising awareness that there are other forms of financing out there that are fast, affordable and transparent alternatives to bank loans and MCAs.
We took a big step in this direction when, this summer in Washington DC, we partnered with other industry leaders to unveiled the first-ever gold standard for responsible business lending in America. As part of the initiative, we launched a national campaign to help educate small business owners about their rights as a borrower and how to find and compare different financing options.
Over the next few years at Funding Circle, we will continue to spread the word about the benefits marketplace lending and invest heavily in technology and talent to help us continue to build a transparent, sustainable and diverse marketplace.
Funding Circle will be expanding ints online lending platform into Europe with its acquisition of Zencap, a German lender with a foothold in Germany, Spain and the Netherlands.
Speigel Online, who broke the story, says just 520 loans have been made over the Zencap platform, worth €35 million (£25.6 million, $39.6 million). Zencap had been identified as the fastest growing online lender in Europe and had received international attention when Victory Park Capital, a lender to online lenders, announced that it would open a €230 million lending facility to access loans on the Zencap platform.
Funding Circle, based in the UK, has demonstrated a willingness to internationalize its peer to peer small business lending platform. It first entered the US market via an acquisition of Endurance Lending in October 2013. Now, with Zencap as part of its international portfolio, Funding Circle is turning its attention to European expansion.
According to Business Insider, Funding Circle intends to do more acquisitions like Zencap to ramp its growth;
It’s been a lot better than we expected to be honest,” Desai tells Business Insider of the US expansion. If you look at it 2 years ago, when Funding Circle came together with Endurance, the old Endurance business was probably doing about $300,000 (£196,200) a month in new lending. If you look at it now, we’re doing around $30 million (£19.6 million) a month in the US. It’s 100 times as big in 2 years. And that’s 30% of our business now, the US. –Funding Circle CEO, Samir Desai
Funding Circle’s own most recent financing round closed in April 2015, raising $150M as part of a Series E round, in which BlackRock, DST, and Temasek participated. Funding Circle has raised nearly $300M in total and is reportedly valued at over $1 billion, a large startup for the UK fintech ecosystem.
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