New tech trends have transformed the business of lending. Join our panel of pros as we reveal essential technologies and processes that can vastly improve your profitability.
An entrepreneur who’s been in business for a couple of years can go through the same lending model for a $15,000 loan as a decades-old big company does for a $15 million loan. He would need much of the same documents too. He needs hours and hours to secure tax records, develop a business plan with a five-year time horizon or more, and provide bank statements to prove creditworthiness. All this work, though, hardly guarantees that he’ll walk away with the financing he needs — big banks are much more inclined towards large business lending.
Alternative Financing Companies (AFCs) such as OnDeck paint a very different picture. If that same entrepreneur approaches OnDeck, not only he is dealing with a company built from the ground up to cater to the needs of SMBs, but to apply, he just needs to give them access and permission to gather all the data they need to make a lending decision — and a decision comes in a matter of minutes rather than weeks.
This is how technology is changing lending. It is creating a win-win situation between clients who get the financing they need with minimal overhead and quicker assessments and lenders who increase profitability while also keeping risk in check.
In the case of OnDeck, the company uses technology to source all the data it needs to allow its proprietary credit scoring system to make quick credit decisions. The credit score is built from over 2,000 data points from over a hundred sources.
This includes traditional records such as bank statements, credit history, and government proof like Secretary of State verification, but also signals social data to give a sense of how a potential borrower’s customers feel about the business. The result is a holistic view of the businesses applying for financing. OnDeck uses this to not only make quick credit decisions but to also improve the customer experience across all points of interaction.
OnDeck SVP of Data and Analytics Krishna Venkatraman — and one of the panelists at our upcoming webinar — illustrates how the unified, holistic view of the customer works for their company.
“Once a business comes in and we know their name and address, we know that, for instance, this is a restaurant that’s been in business for ten years, located in the heart of the city,” he says. “But we also know they’ve received great reviews. We see that other businesses like them in the vicinity have taken loans from us in different amounts. We can compare them to other customers and their peers. And perhaps they’ve applied to us previously and we have their records.”
He explains their sales agents have all the relevant information before they speak with the business, allowing them to cut through a lot of preliminary work. “No need to ask the same questions,” Venkatraman says, “We can adapt the conversation.”
“Or for manufacturing, which is slightly more complex,” he noted, “They usually have larger contracts but less frequently. Their cash flows have a different signature. If our sales agent or our credit model understands that well, we can assess that business that much better.”
Profitability and the status quo
OnDeck has so far lent $3 billion in over 70,000 loans to businesses across the US, Canada, and Australia with its tech-driven model that automates data gathering and structured analysis of credit risk.
The profitability of this approach boils down to the types of small business loans the company finances, coupled with the continuous signals it gets from merchant performance. Generally, AFCs lend smaller amounts for shorter terms. To keep risk in check, they leverage a much more frequent feedback schedule and thorough client tracking. The quick amortization of loans enables AFCs to put a cap on the total risk exposure. They get repayment history information much quicker than other lenders in the space and mix in macro-economic trends and stress testing the same way traditional outfits would, allowing them to proactively manage their portfolio.
In addition, AFCs are not outright challenging incumbents.
“What we’re doing is actually quite complementary,” Venkatraman says. “Banks are great at serving large businesses. We are better for smaller businesses with smaller, more frequent needs that can be quite transient. We provide speed, convenience, and access to capital in ways that fit with their pace of business.”
“It’s a good balance,” Venkatraman says, adding that partnerships between traditional banks and AFCs are actually starting to play out.
The future of the model
In almost every industry, companies that invest in their tech stack to extract the information they need and use it to make decisions are the ones that succeed. Companies that make data work on behalf of their customers, like Amazon for instance, primarily started out challenging established paradigms and ended up being the preferred models.
Today, people bank through mobile devices. Tomorrow, they will be borrowing small loans through them. The same Millennials who today are checking balances, making payments, and drawing from available lines of credit through digital means will expect it to be normal when they start their own businesses and look for capital.
Lenders with the technology and predictive capability to know when a business needs financing, how much they would need, and the right product for them will have the competitive advantage. Especially if the same lenders can make credit decisions in a snap compared to traditional financing.
Don’t miss out!
In this webinar you’ll:
- Learn the trends driving change in marketplace lending and credit risk management
- Build more accurate predictive ratings models based on alternative data sets
- Get insight into the future of marketplace lending and credit risk management
Scott Crawford, VP of Product and Marketing, Ascend Consumer Financial
Krishna Venkatraman, SVP of Data and Analytics, OnDeck
Terrence McKeown, Practice Manager, Credit Analytics, Envestnet | Yodlee
Wendy Schuchart, Analyst, VentureBeat
This webinar is sponsored by Yodlee.