Small businesses today no longer need to convince a bank to get a loan. They can very well convince an algorithm that will assess their credibility based on a diverse parameters rather than a conventional credit check.
By Mohit Joshi, Executive Vice President, Head - Financial Services, Head- Infosys Brazil and Infosys Mexico
This captures the essence of an emerging alternative source of financing – the big data driven online lending platform. When the financial crisis dried up credit to most small businesses, a number of digital players, such as OnDeck, Kabbage and Funding Circle to name a few, willingly stepped into the gap. Amazon joined their ranks when three years ago, it launched the Amazon Lending program to offer quick – but at around 14 percent not that cheap – working capital to its star merchants in the United States. While it was done without fanfare, Amazon being what it is, the launch ratcheted up predictions of the imminent disruption of small business lending. In fact, the market for online lending (consumer and business) is expected to grow to a trillion dollars in volumes lent out, by 2025. A very significant number.
Quick and dirty
What Amazon Lending and similar propositions offer is a convenient and extremely fast financing option. There’s none of the procedural labor pain of a big bank loan, and the money is in the bank within minutes – 7 in the case of Kabbage, and a comparatively sedate 60 when it comes to iwoca. What makes this possible is the platforms’ extensive big data resources and expertise in social underwriting, enabling them to quickly profile a borrower’s creditworthiness in novel ways. Rather than performing a conventional credit check, online lenders rely on analytics of hundreds of variables and several thousand data points – ranging from cash flow, credit history and legal track record to shipment frequency, repeat business revenue and public online ratings – to do the job, and thereby circumvent the need for weeks of offline due diligence. That being said, lenders are quick to point out that no single formula fits them all.
Amazon for instance, lends only to high performers. A business must sell a certain volume of goods on the Amazon storefront before it can receive an offer of a loan. Not just that, it must also sport the right credentials, such as a reputation for customer focus. Hence the more favourable the customer reviews, the better the chances of securing a loan. Once a loan application is approved, the money is advanced to the merchant’s Amazon Seller Account in about 5 business days at the most and thereafter disbursed to
their bank account. Amazon recovers monthly payments from the borrower’s Amazon Seller Account, but there is also the option to prepay. In return for providing such convenience Amazon commands enviable interest rates from a captive base of prime borrowers to enjoy what has to be a very profitable, low risk, side business.
On the brink of disruption
The speed and simplicity of this process is adding fuel to the already fiery debate on banking disintermediation. In consumer surveys, banking has been named the industry most vulnerable to disruption at the hands of nimble, technology-led, innovative non-bank players. On the small business loans front, incumbent banks haven’t done themselves any favors by pulling out of a rough market characterized by high origination costs, regulation and low profitability. Worse, in markets like the United States, traditional banks are coming off second best when it comes to “ease of doing business”, a key driver of satisfaction among business banking customers.
Given these circumstances, it seems almost inevitable that online lending platforms will go on to disrupt their niche of the business. The numbers say so too. In its few years of existence, Kabbage, the leader in this space, has provided about US$ 4 billion in funding to more than 100,000 businesses, which, although not a large amount in itself,
is not to be sneezed at. As online platforms hone their ability to analyze big data into accurate credit risk assessments, they will certainly aim for bigger things.
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