How Outsiders Are Changing the Business of Lending

The total addressable US small-business lending market is $186 billion, which accounts for only 1% of the total loan market. Today, big banks (assets of $10 billion+) are granting more than one-quarter of the small-business loan applications they receive. The 25.3% approval percentage is another new benchmark for big banks.

However, FDIC reports the total dollar-volume of small-business loans outstanding across all FDIC-insured institutions is down 13% since 2008. According to the Federal Financial Institutions Examination Council (FFIEC), the number of small-business loan originations is down 41.4% since 2008. For comparison, the US economy has grown almost 25% over the same period, according to the US Chamber of Commerce.

Although the approval rates of small-business loans by large institutions is at an all-time high in the US, it’s still only a quarter of applicants that get the necessary funds. As for the developing world, estimates suggest that 65 million, or 40% of micro, small & medium-sized enterprises (MSMEs) have unmet financing needs, resulting in an MSME finance gap in developing countries at $5.2 trillion.

Despite the fact that approval rates from large institutions are at all-time high, about 75% of small-business loans are denied by large institutions in the US, forcing a change in the marketplace – small businesses are actively exploiting other available options, whether it’s loans from smaller institutions, credit unions or online lending platforms. The emergence of online marketplaces is laying out the options of the balanced accessibility of information on the loans that serve small businesses’ interests best.

With the democratization of financing, the business of lending was bound to become a low-barrier, highly competitive space. Newcomers are filling the void and reshuffling the roles in the ecosystem. The new main actors in the lending industry – consumer and business – are the likes of Amazon, Google, Facebook, Apple, Baidu, Tencent, Alibaba, Uber, Ola, Grab, Square, PayPal, and, of course, a grand variety of online lending platforms operating around the world.

Many of the newcomers stepped into a void left by crisis-scarred banks and the traditional rigidity of existing risk assessment/scoring frameworks that no longer allowed for an adequate extension to credit to under-financed entities.

Source: CNBC

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