(Interview taken at LEND360 on October 6th 2016)
Small and medium-sized enterprises (SMEs), firms with fewer than 500 employees, are the backbone of U.S. economy. They make up 99 percent of all firms, employ over 50 percent of private sector employees and generate 65 percent of net new private sector jobs. Any financial institution looking to service this segment is looking at a Trillion dollar market. But brick and mortar banks have been traditionally hesitant to lend due to inability to analyze SMEs credit worthiness and the high cost of customer acquisition and servicing. In online marketplace lenders, SMEs have found the right partners who understand their funding needs and are able to provide credit in a hassle free, time-sensitive manner. The undisputed market leader in the segment is New York-headquartered OnDeck, which has revolutionized how small businesses are financed and is the pioneer in utilizing alternate data points to provide credit to firms which had previously been rejected by banks. Testimony to OnDeck’s decision to support SMEs is in the figures it has amassed in last few years. $3 billion lent by OnDeck has resulted in $11 billion in incremental economic output and generation of 74,000 jobs.
New York FED estimates that small businesses on an average approach 3 financial institutions and spend 33 hours on applying for credit. When OnDeck entered the alternate lending space, its marketing plan was focused on the speed of funding to small businesses. As it has evolved and other lenders have emerged, speed has become a commodity. It has rebranded itself into a service oriented lender with the broadest range of products. Being able to understand and serve all customer needs has become the bedrock of the company ethos. Taking its vision further, OnDeck now wants to focus on providing more solutions that will cover pretty much every kind of business need. It is now providing term loans and credit lines ranging from $20,000 to $500,000, making the process even more efficient than it was before and by ensuring exceptional high-level service. Scoring 81 on net promoter score (the tool used to measure the loyalty of firm’s customer relationships) proves Ondeck is not just marketing talk but it actually takes customer satisfaction very seriously. It has also introduced highly skilled “loan specialists” who can hand held a business owner in taking the right credit decision.
OnDeck COO James Hobson wants regulatory bodies to have a balanced approach when making regulations and understand the benefits SMEs derived through lending. It is important that the lawmakers recognize the nuance behind lending money to a business versus a consumer. They need to appreciate that business generate additional cash flow from the money lent which is usually at a rate much higher than the APR of the money lent. Even though the current Presidential election in the US has thrown its fair bit of surprises and controversies, Hobson feels no matter which candidate wins, it will not impact OnDeck as both parties strongly support SMEs.
Ondeck has been able to reduce the APR charged to borrowers over the years. Hobson feels there are mainly two reasons for that:
- Innovation in Credit: It started with lending small amounts for a smaller duration to the borrowers who are not served by the banks. When banks turn someone down, it was OnDeck to help and that’s how it also got its name. Now it has become the go- to alternative and has also started serving other segments as well.
- Lead by Adoption: With alternate lending entering the mainstream, customers who would traditionally go to banks are also looking at Ondeck to provide a better experience with a faster turnaround than brick and mortar banks.
This has improved opportunities to provide loans for a longer tenure and to stronger businesses which in turn leads to a reduction in the APR.
The 2006 born fintech unicorn further established itself as the runaway leader in the space by partnering with JPM to provide online credit solutions to JPM’s 4 million small business clients. The bank will use OnDeck’s underwriting technology for funding and quick approvals. It will be Chase branded loans and will appear on Bank`s balance sheet, OnDeck will provide loan services and in return will receive origination as well as servicing fee per loan. OnDeck is providing tailor-made platform keeping in mind JPM needs and on top of that it will also provide customer service to their customers. The partnership is considered to be a seminal event in the evolution of fintech lending start-ups.
OnDeck identifies diversity as one of the key pillars of growth; hence it has partnered with banks, non- banks and is also running its independent originations. It plans to keep working on all three fronts by segmenting it on the basis of risk profile. A good portion of small businesses do not get approved because of the stringent approval criteria of the banks and that’s where OnDeck can pitch in and help the banks as well as the small businesses by filling the void.
Even though banks have the infrastructure, manpower, and resources to complete with OnDeck but they are pretty far behind when it comes to efficiency in terms of time and cost. Another thing they cannot replicate is the database OnDeck has amassed over the period of last 9 years. The company has started expanding its wings by offering its services in Australia and Canada. It wants to establish itself in these two countries as it feels there is a huge untapped market there.
OnDeck funding strategy is also built on diversity; hence it uses 3 different kinds of sources:
- Warehouse line with Banks
- Market place whole loans.
It has been reallocating the funds for past 4-5 months because it has understood buyer’s appetite in the marketplace changes pretty quickly and drastically. Hence it is doubling down on diversity so that there are no surprises for the company.
Hobson feels that the company’s secret sauce is its ability to utilize multiple databases to create a successful underwriting model. It uses Equifax, Experian, PayNet, D&B and more than 100 other data sources to model its algorithms. Over 30% of SMEs have thin credit files and the ability to judge their credit worthiness is essential for online lenders. OnDeck is the undisputed captain of the SME lending industry. But it understands that disruption on the basis of the speed of funding is no longer enough, it has metamorphosed itself into an institution with its focus on client service and offering the largest bouquet of credit options to businesses. OnDeck has a stable business model and seems to be a much safer bet than its consumer lending peers.
Author: Heena Dhir and George Popescu