By Emily Reynolds for Wired
Social media data is being used to help approve loans for small businesses. But how prepared are traditional banks to take on nimble fintech startups?
Getting a small business loan can be arduous. Paperwork, meetings, bureaucracy – the process can often take several months or longer.
But, according to Kabbage co-founder Kathryn Petralia, it doesn’t have be this difficult. Petralia’s company is one of a number of fintech startups opening up financial systems, replacing creaking systems with fast, intuitive apps and services.
“Our customers get through the application and have access to funds, and funds within their account, within seven minutes,” she tells WIRED. And this sort of disruption is happening across the financial industry.
Petralia has worked with technology startups for the last twenty years, covering everything from consumer credit to e-commerce and payments. In 2008 she co-founded Kabbage, which helps small business get loans more easily. She describes most of her twenty years’ work as being “around fintech”, even though the term is relatively new.
Kabbage gives loans to small businesses – many of whom would fail to get credit from larger, traditional banks – not by spending months trawling through their financial histories, but by using what Petralia describes as a more efficient, automated platform. The company, at which Petralia is now head of operations, offers up to $100,000 (£70,000) in credit to small businesses, with an average loan of $25,000 (£17,000) typically paid back over six months.
Kabbage takes the same kind of data used by banks to ascertain whether a small business is eligible for a loan, but uses automated systems to expedite the process. Customers give the company access to the sources that help them run their business – such as checking accounts and shipping data – but also data from e-commerce platforms and even social media. Kabbage then connects and analyses these data sources to provide a loan.
“These data sources – because they’re digital – aren’t just used at the point of origination,” explains Petralia, who will be speaking at WIRED Money 2016 in London on June 23. “We also stay connected throughout the relationship with the borrower, which allows us to provide a unique line of credit.” What this doesn’t mean, however, is that a bunch of Twitter followers can get you a loan – social data is just one part of a wider picture that the company takes into consideration.
Other firms are using similarly unconventional methods to help small businesses; InVenture, another fintech startup, has done away with a single credit score, instead gathering around 10,000 data points for each service user. While Kabbage mainly targets small businesses left on the sidelines by big banking institutions, InVenture works to give customers in “traditionally ignored economies” such as Kenya and Tanzania credit and banking services.
Kabbage’s key customers are businesses asking for “less than a couple of hundred thousand dollars”, says Petralia. This kind of company is often refused a loan by a big bank, she explains, because the pay off just isn’t good enough for large financial institutions. She describes many of Kabbage’s clients as “an unserved population”.
“Big banks have a very hard time delivering less than a couple of hundred thousands of dollars,” she says. “They generate a lot more revenue on the larger loans, so they tend to avoid the smaller dollar loans.”
This is partially because smaller businesses are more volatile, and partially because it’s “hard for them to use the assets they have to originate those smaller loans”. This is also the reason why Kabbage’s interest rates are higher than those offered by traditional banks.
“I wouldn’t want to say that banks are obstructive [to small business owners],” she tells WIRED. “I would just say that they simply haven’t been able to serve them, even though I think they would like to. We started Kabbage because we wanted to offer a really unique source of data – e-commerce data – to deliver loans to small businesses. What we didn’t realise was how large that market was.”
Despite serving a different market, Petralia says Kabbage’s services aren’t so dissimilar to those offered by big banks. “We’re actually asking the same questions that the banks are asking,” she explains. “What we’re doing differently is connecting in real time to third party, verified data sources that give us a more holistic picture of that business.” Traditional banks, she continues, are actually in “the best position” to provide services to small businesses. They have access to the customer, access to funds, and in many cases access to “a lot of the data” about these businesses. The only thing they’re missing is the technology.
But that’s starting to change. Kabbage licenses its technology to third parties to help incumbents deliver new services. Early customers include ING and Santander, which use Kabbage’s systems to make it easier for small businesses to get access to loans from more established money institutions. These partnerships also ensure that Kabbage is subject to the same regulatory standards as traditional banks.
Kabbage is already one of the top three small business lending companies in the US. Over the last decade these three companies have delivered over £12 billion in loans to small businesses. From blockchain to big data, investors are keen to get a slice of the fintech pie – so does Petralia worry that over valuations could lead us to another financial crash?
“It’s not big enough!” she says. If you compare “all of fintech” to the kind of lending that was happening before the global financial crisis, she continues, it’s “a drop in the ocean”.
“It simply does not pose the same kind of systemic risk that was created by the real estate lending market between 2005 and 2008. So no, I don’t worry about that.”
Petralia does expect investments to slow down, however, which may pose a problem for businesses that aren’t sufficiently capitalised. But that’s not going to cause a crash, she says.
“Fintech means a lot of things. But all banks are fintech companies. All financial institutions are using technology to run their businesses, and that’s going to continue.”