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November 26, 2019   Digital, NEO, Open Banking, Open Finance, Enterprise, Entrepreneurs, Start-ups, Small Businesses, FinTech and Alternative Finance, Fintech International, Fundraising, Investing, Trading, Marketplace Lending/P2P, Lending, Digital Bonds, BNPL, Research, Voices   No comments

Alternative Lenders Continue to Steal Business From Banks

The Financial Brand | Jim Marous

Paypal SME lending - Alternative Lenders Continue to Steal Business From BanksThe banking industry has enabled alternative providers to impact the competitive balance for payments, investments and deposits. By not developing customer-centric digital lending platforms, traditional lenders have now also allowed digital players to steal significant loan customers.

Most traditional financial institutions associate PayPal with being a significant player in the competition for consumer payments. Their growth, along with the growth of Venmo, Square and other digital payment alternatives, is well documented. What is less well known is the rapid growth of PayPal as a digital lending alternative. It may be time for banks and credit unions to wake up, however, as the company announced that they had crossed $10 billion in small business lending in only 5 years.

“It took PayPal twenty-three months to get to the first $1 billion in lending,” said Darrell Esch, Vice President of global credit at PayPal. “Demand has never been in shortage.” According to research from deBanked, it took PayPal only five years to reach the $10 billion milestone.

The loan originations were spread out across 225,000 small businesses globally according to PayPal, including the US, UK, Australia, and Germany as well as Mexico through a partnership with another online lending platform. Currently, however, PayPal is originating $1 billion per quarter … making this digital player a very formidable competitor.

Amazon Joins PayPal as Top 5 Small Business Digital Lender

While the growth of PayPal as a digital loan alternative is impressive, they are far from the only digital lender impacting the lucrative small business lending marketplace. Amazon has joined PayPal, OnDeck, Kabbage, and Square as a top 5 digital small business lender. In fact, Amazon revealed that it had made more than $1 billion in small business loans to US-based merchants in 2018.

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In total, there are more than 1.9 million businesses, content creators, and developers in the U.S. using Amazon to deliver their products and services. According to Amazon, small and medium sized businesses now account for 58% of Amazon sales – up from 30% ten years ago.

The peer-to-peer business lender, Funding Circle, also revealed its first-quarter trading update, showing that loans under management rose by 44% compared to the first quarter of 2018, while originations grew by 23% (they have originated $9.5 billion in loans). This indicates that there is greater competition between alternative and traditional lenders, as well as increased competition within the alternative lending marketplace.

Digital Lenders Leverage Data for Improved Experiences

As with most digital banking alternatives, the top small business digital lenders use vast customer insights and competitive terms to deliver personalized offers and experiences to small businesses. Most of this is done in conjunction with small businesses still having banking relationships for holding funds and making disbursements at traditional banks and credit unions.

Alternative digital lending firms often provide small businesses more favorable terms on loans than can be received from traditional financial institutions. They also provide more financing options and faster approval than traditional banks. Alternative lenders like PayPal also approve small business loans at higher rates — 56% compared to 26% approval rates by big banks, according to data from Biz2Credit.

Because PayPal, Amazon, Square and other alternative lenders have access to transaction history of sellers on their platform – and often use that merchant’s sales data instead of a credit score – they can quickly determine the credit worthiness of a small business borrower. Comparably, banks and credit unions usually only have access to a small business’s deposits and bank accounts, unable to see the entire picture of a company’s sales.

“PayPal business financing programs can provide funding from $1,000 – $500,000 for small businesses looking for both quick decision-making and immediate usage as an application decision that usually occurs within minutes or hours, if approved, allows the business to start using the funds almost immediately,” said Esch.

This availability of funds comes at a time when many traditional organizations have pulled back from offering small business credit. According to the Federal Reserve’s Small Business Credit Survey, as many as 70% of merchants didn’t receive the funding they wanted in 2018.

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“If you look at the great recession what you’ve seen is a bounce back of commercial lending, but lending to small businesses really hasn’t come back,” states Esch. A lot of the hesitancy is attributed to the cost of underwriting. Banks are usually not in a position to lend small amounts of money on a frequent basis. Digital alternative lenders are built for this type of lending.

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NCFA Jan 2018 resize - Alternative Lenders Continue to Steal Business From Banks The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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