Digital lending has become an essential service for small businesses seeking faster access to working capital than traditional bank loans can often provide. Fintech platforms have transformed the lending process by using data analytics, automation, and machine learning to streamline underwriting and accelerate approvals. As a result, established financial institutions have increasingly looked to acquire innovative lending technology rather than build these capabilities from scratch.
American Express’s acquisition of Kabbage reflected this strategic approach. By purchasing Kabbage’s technology, talent, and digital lending platform—while leaving behind its existing loan portfolio—American Express positioned itself to expand its small business services without assuming unnecessary credit risk during a period of economic uncertainty.
American Express was brilliant in its acquisition of Kabbage. It bought the technologies, not the loan books. Tech Crunch reports:
- The financial terms of the deal are not being disclosed, but reports earlier this month put the value of the acquisition at up to $850 million. For some context, Kabbage had raised nearly $990 billion in debt and equity (and at least $3.5 billion in securitizations), and was valued at over $1.2 billion in its last equity round of $250 million, in 2017, led by SoftBank.
- The acquisition comes at a tricky time not just for SMBs but also the fintech companies that serve them, and specifically for Kabbage itself, with all of them weathering the storms of COVID-19.
- Amex’s acquisition, tellingly, will include employees, technology and financial data, but “Kabbage’s pre-existing loan portfolio is not included in the purchase agreement,” Amex noted in its press release.
Unless you are buying a receivable from a bankruptcy court or fire sale, there is not much of a good reason to buy an existing portfolio in these days of COVID-19. Amex knew that!
- We don’t have a total amount of value for that loan book, but a spokesperson confirmed it includes not just loans that Kabbage had issued in its previous years of operation, but also loans made to SMBs in the U.S. under the Paycheck Protection Program. As of last week the latter totaled $7 billion across nearly 300,000 loans; and in 2019 Kabbage told TechCrunch it was on pace to loan out between $2.5 billion and $3 billion, so the pre-existing loan portfolio is not insignificant, and in current economic times, possibly one that comes with a lot of risk.
And, while Kabbage may have a stressed receivable, the firm knows technology and the small business space. And, for American Express, the leader in small business credit cards, this is a no-brainer.
- Disrupting traditional banks and their slow and often frustrating approach to evaluating loan applications, Kabbage taps a wide variety of sources, from traditional accounting statements through to social media signals, into its proprietary machine learning algorithms, in order to determine eligibility for issuing loans, and the terms under which a business would pay it back. It was successful enough that Kabbage was also offering its product as a white-label service to other loan providers (including the banks it was disrupting).
For American Express, it also provides an opportunity to broaden its offerings to small business.
- For several years, American Express has been expanding beyond our industry-leading commercial card products to offer our business customers a growing set of payment and working capital solutions,” said Anna Marrs, president of Global Commercial Services at American Express, in a statement. “This acquisition accelerates our plans to offer U.S. small businesses an easy and efficient way to manage their payments and cash flow digitally in one place, which is more critical than ever in today’s environment.
- By bringing together Kabbage’s innovative technology and talented team with our broad distribution capabilities and over 60 years of experience backing small businesses, we can better help our customers successfully emerge from this challenging period and beyond.”
American Express already owns a large portion of the small business card market. This move is a game changer that will bring the company far beyond just plastic.
The acquisition of Kabbage demonstrated how financial institutions can strengthen their competitive position by investing in technology instead of legacy assets. As small businesses continue to demand faster financing and integrated cash flow management tools, digital lending capabilities will remain an important differentiator. By combining fintech innovation with established customer relationships, American Express expanded beyond traditional card products and reinforced its long-term commitment to serving the evolving needs of small businesses.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group