What banks can learn about lending through PayPal and Square
Tech platforms like Kabbage and OnDeck have been competing with banks on small business loans for some time. Now a new breed of players is raising the stakes. During the past year, non-bank companies, including Ali Baba, Pay Pal and Square have started offering loans to businesses directly through their dominant e-commerce and payment platforms.
While these companies are currently offering smaller commercial loans than many banks are willing to provide, banks cannot assume that this will remain the same. All three already have a massive and very engaged user base. Since PayPal has won 5.8 million new users in the first quarter and that Alibaba is preparing because what many are predicting will be a massive initial public offering, they clearly want to expand even further. The more these businesses build lending relationships with existing customers, the more likely they will be to expand into the sought-after, higher dollar-value lending segments that banks covet.
In order to remain relevant in the small business lending arena, banks need to learn from these forward-thinking businesses by simplifying their own lending process and integrating it tightly with existing financial platforms. Otherwise, the convenience and speed of these new, more fierce competitors could force banks to abandon small business lending for good. Here are three ways banks can improve their game.
Allow automatic refunds and deposits
This should be the first step for banks to take to streamline their lending processes. It takes relatively little effort, and almost all successful alternative lending platforms already do. Alibaba’s Taobao division and PayPal’s working capital program automatically deposit loans and withdraw repayments using the built-in business owner wallets. Established alternative lenders like OnDeck and Kabbage do the same with borrowers’ existing bank accounts. Since the banks control these same accounts, they have no excuse for falling behind. As long as they do, they let their competitors use their own platforms and resources against them.
In this first step, it is important for banks to enable this automation for a variety of account types. Many small business owners use their personal bank accounts for business purposes. Banks will not be able to make their loan programs truly accessible if automatic repayments and deposits only work for a fraction of their customers.
Automate user data analysis to speed up the loan review process
PayPal and Taobao already offer this exact service, automatically drawing on merchant sales history to make quick decisions about whether or not to extend a loan and what interest rates they should charge. Borrowers put in very little effort to complete loan applications, and businesses are able to make informed and quick decisions.
Banks have access to a wealth of data on small business customers, including transaction history and credit card statements. This information is much more comprehensive than anything PayPal and Alibaba can access through their platforms. Banks that make full use of the data they already have will be able to look beyond credit scores to gain an in-depth look at the financial situation of potential borrowers. Automatically analyzing the data to set interest rates and provide approvals would also be a big draw for clients who want a quick turnaround time. especially if banks effectively market these benefits to their current customers.
Play the middleman to fend off competitors
Matching offers from PayPal, Alibaba, and Square won’t be enough. Banks must find ways to get ahead of these aggressive competitors in order to regain their dominance in small business lending. Inspired by successful peer-to-peer companies like Funding Circle and Lending Club ?? who use crowdfunding mechanisms to play an intermediary role between small business borrowers and individuals or groups of investors ?? could be a possibility. Banks already have extensive networks of potential investors through their wealth management and consumer activities. If they were to take advantage of these networks to create their own peer-to-peer small business lending platforms, they would be able to dictate the terms of a greater proportion of loans and begin to take control. the business lending space in the same way that Apple and Google control the app ecosystem.
So far, PayPal, Alibaba, and Square have done a very effective job of integrating their loan programs into their platforms. The more users these platforms gain, the more their base of potential borrowers grows. And if they continue to effectively use the platform’s resources to market loans at reasonable interest rates, busy small business owners might not even bother looking for a loan elsewhere.
But banks have the platforms, the data, and the broad reach to reap similar benefits. They should use these resources to provide small business borrowers with a quick and hassle-free application process that they can complete right on their bank’s websites. Of course, learning how to properly use these resources will take time. The banks must start now.
Greg Weddell is the Director of Small Business Practice at Yodlee, the digital financial platform. In addition to his work with Yodlee, he has 25 years of experience in executive roles for major US and regional banks.