[Editor’s note: This is a guest post from Stephen Sheinbaum, Founder of Bizfi, an aggregation marketplace that offers many kinds of alternative funding, from short-term finance to longer term loans, equipment finance and lines of credit. Since 2005, Bizfi has originated in excess of $1.5 billion in funding to more than 28,000 small businesses. It has also provided technical assistance to alternative finance companies outside the United States. Bizfi is a Silver sponsor at LendIt USA 2016, which takes place on April 11-12, 2016, in San Francisco.]
Alternative finance companies and traditional banks do not operate in the same fashion with regard to funding small businesses. This year, however, a growing number of institutions will find themselves partnering with alternative lenders in an effort to better serve small business clients. Partnerships between young alternative finance companies and established banks are beneficial to all of us in the finance industry, so it’s no surprise that in 2015 we saw some of the world’s largest banks partner with some of the most technologically advanced alternative finance companies.
Look at it from the perspective of AltFi first. One of the biggest challenges in our industry is customer acquisition. We are spending significant portions of our budgets on identifying and appealing to small businesses. We’re buying internet advertising keywords, running direct mail campaigns and creating radio, TV and print spots to get the word out.
For some of the newcomers to the alternative finance industry, the cost and complexity of customer acquisition will prove overwhelming. They won’t be able to master it and, perhaps worse, it will drain funds away from the investments they could make in underwriting assessment models or the analysis of data, structured and, increasingly, unstructured. Chasing customers could chase them right out of business.
Banks, by contrast, have well-established name recognition and customers. I’m sure that most of today’s small business owners had personal checking and savings accounts long before they needed business accounts. Many of them had mortgages or car loans, too. But when they turn to their banker for business finance, too many of them get turned away. The high overhead of traditional lenders means that they can’t make a profit providing the kinds of loans that most small businesses need. At its Small Business Banking Conference last year, American Banker posited that banks will lose money on a $100,000 loan. That almost certainly means that banks will lose money on the $40,000 and $50,000 loans that are most common among small businesses. Banks are well aware that turning down a small business funding request could cause them to lose something else as well: The depositor who once felt like a valued customer.
Banks have much to gain from partnering with alternative finance companies, and not just because AltFi can provide the funding that banks traditionally don’t. AltFi is a digital native, and many aspects of its technology are better and more user-friendly than that of traditional banks. AltFi companies are pioneering underwriting models that are combining traditional metrics like FICO scores with other data to produce a more nuanced view of both a small business’ ability and willingness to repay. That is particularly true of the AltFi companies that have chosen to pair tech-driven underwriting with trained customer-service teams. They can analyze the data on the business and ask questions about what they see. Bankers know that they can learn a lot from a conversation with their prospects but they don’t often have the capability to have those conversations.
Partnering with an alternative finance company can also allow a bank to offer product sets that aren’t currently part of their business model. A bank might be comfortable with medium-term loans, but not with equipment finance. The bank may have worked hard to be an approved lender with the U.S. Small Business Administration, but it doesn’t have the expertise to fund franchises. The leading alternative finance companies are, increasingly, bringing a multitude of choices under one roof and, in some cases, on one online platform.
Most importantly, banks and alternative finance companies will partner because it will be easy to do so. Alternative finance companies have been working on technology that will allow banks to take advantage of their services in ways that will almost be invisible to their clients. Rather than spending time on a loan application it is likely to decline, a bank can work through an alternative finance company’s application program interface (API) to direct that customer to a source that can approve it. The API and white-label technology that is being pioneered by alternative finance companies will spare banks from the costly and cumbersome process of trying to integrate new software into their legacy systems. They can remodel the house without tearing down the walls.
The host of this blog, LendIt, is the largest conference series dedicated to connecting the global online lending community. Our conferences bring together the leading lending platforms, investors, and service providers in our industry for unparalleled educational, networking, and business development opportunities. LendIt hosts three conferences annually: our flagship conference LendIt USA as well as LendIt Europe in London and LendIt China in Shanghai. Visit our home page to register for the next event and to subscribe to our newsletter.