The past few years have seen an explosion in the number of companies jumping into the small business financing sector. And you would think banks like Wells Fargo (WFC) would be worried about all this new competition. But trust me, they’re not. And they shouldn’t be. Don’t believe it? Just take a look at the competition.
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Earlier this year, office retailer Staples (SPLS) began a small business loan program in partnership with online lender Lendio (more on them later) and it surpassed $1 million in loans extended within its first 43 days. Walmart’s (WMT) Sam’s Club warehouse club operator, said in August that it would help its small business members gain access to loans of up to $350,000. Walmart’s Money Center already offers its customers a number of services like mobile checking accounts, credit cards, money transfers, check cashing and bill pay that compete with banks. Target (TGT) is also offering its own debt and credit cards.
For those small businesses not interested in getting loans from their local retailer, there are plenty of options from their payment processor too. For example, Square Capital, the financing arm of the company founded by Jack Dorsey, who just became Twitter’s CEO (TWTR), uses the data it collects on its customers' cash flow to determine who qualifies for financing. Once qualified, Square then takes a cut of the borrower’s credit card sales until the loans are repaid, a helpful cash flow alternative for the small business owner who suffers a slow month in sales and is not forced to make the same fixed loan payment. Since May, 2015, Square says it has advanced $225 million in financing to small companies. PayPal (PYPL) does the same thing through its Working Capital program as does Intuit with its QuickBooks Financing program. And popular money transfer sites like Venmo give both individuals and small businesses the ability to easily send and receive money for free just by using their Facebook (FB) account or email address.
Online lenders have proliferated. According to this report “the volume of loans that marketplace lenders have extended has doubled every year since 2010 and hit $14 billion last year, according to Morgan Stanley analysts. They predicted it would continue to grow at a compound annual rate of 47% through 2020,” the growth prompting scrutiny from the U.S. Treasury. To be sure, the leaders in this industry, who include Can Capital, Kabbage, Lendio, Prosper and others, provide a valuable service to those small companies who are unable to achieve financing from traditional banks and who are willing to allow access to their daily financial, online and social media activities. These companies are using the latest technologies to evaluate potential borrowings and monitor their customers’ businesses for any warning flags in almost real time.
Finally, there is a hint of greater things to come through crowdfunding. Only recently has the Securities and Exchange Commission relaxed its rules on crowdfunding, now allowing smaller companies to access equity online from both accredited and unaccredited investors without being forced to undergo an audit or face oppressive filing requirements. Sites like AngelList, CircleUp and Crowdfunder are joining well known leaders Kickstarter and Indiegogo to offer a growing number of options for small companies to raise money from the general public in return for equity while providing a very enticing alternative for those that want to avoid doing business with the big banks.
It would seem as if this competition would be a problem for Wells Fargo and others in the banking industry. But don’t believe that.
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Sure, some of these customers may have done business with Wells. But for the most part, the companies getting these loans are mostly smaller, riskier ventures that likely wouldn’t have qualified for a bank loan even before the days of Dodd-Frank. They are companies with little collateral and immature financial systems that need short term cash for working capital purposes and are willing to pay much more through higher fees and rates in exchange for capital and flexibility in repayment terms.
In other words, these are not Wells Fargo’s customers. These are prospective customers that would normally sap a bank’s resources through a loan application process and, if miraculously approved, likely require significantly more oversight. Today’s banks, like Wells Fargo, would prefer to deal with more mature companies. For sure and as they grow, a percentage of companies now receiving short term financing from the likes of Walmart, Square or Can Capital are going to one day need to graduate to a more formal banking relationship. And by then, with a track record and credit history, they’ll be good, qualified customers for Wells Fargo to pursue.