In my recent report on the small business credit card market I made the case that issuers should champion transparency in their products and customer communications. My argument was that this focus on transparency would contrast favorably with the confusing/opaque/occasionally manipulative approach taken by many alternative small business lenders.
A new report from seven regional Federal Reserve banks confirms that this is good advice. From an American Banker article by Kevin Wack:
“Many of the nation’s less-creditworthy small businesses are falling into the open arms of online lenders. And while most of these applicants are getting approved, few of them come away happy.”
I would encourage you to read the entire American Banker article, as it is quite fascinating, but here are a few of the key findings from the Federal Reserve:
“Of all the small businesses that applied for a loan or line of credit within the past year, 20% said they sought credit from an online lender. The application rates were higher at the smaller firms; 30% of companies with less than $100,000 in revenue said they had applied to an online lender.”
“Large banks approved 88% of business applicants that had more than $10 million in annual revenue, but only 33% of applicants with less than $100,000 in revenue. Meanwhile, small banks approved 96% of applicants with more than $10 million in annual revenue and 60% of applicants that brought in less than $100,000 per year.”
“Online lenders approved 71% of the applicants for at least some credit, according to the survey. But just 15% of the businesses that got approved reported being satisfied. That compared to a satisfaction rate of 51% for large banks and 75% for small banks.”
Take another look at that last one. Just 15% of businesses approved for loans from online lenders were satisfied, compared to 51% and 75% for large banks and small banks respectively. That’s stunning. That’s why OnDeck Capital is pivoting from being a direct lender to a technology enabler (as it is in the arrangement with JPMorgan Chase). A business model that results in 85% of your customers being unsatisfied isn’t sustainable.
Overview by Alex Johnson, Director, Credit Advisory Service at Mercator Advisory Group
Read the full story here