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Cloud Analytics End Small Business Loans Drought
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Re: Innovation in banking
  • 4/6/2015 4:31:44 PM
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kq4ym: Really good point. Yes, I would not be surprised if the community bank finds it a lucrative opportunity to sell small unsecured loans on behalf of the cloud credit rating companies. On the web, its hard to miss Kabbages of the world but community banks have personal knowledge about who might need the loans.

Re: Innovation in banking
  • 4/6/2015 8:40:29 AM
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I notices curiously our small community bank in SW Florida is advertising unsecured business loans on it's bank front billboard. I haven't seen promotions of unsecured lending for a long time. I wonder if the small banks are using cloud credit rating services in this more risky lending.

Re: Innovation in banking
  • 3/31/2015 10:51:58 PM
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Stick it to the man! Loans with impossible interest rates ultimately just benefit the bankers. I wish we had similar rates on savings accounts!

Re: Innovation in banking
  • 3/27/2015 10:09:22 AM
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..

Kishore writes


Lending Club's successful IPO, valued at $8.5 billion on its debut and eventually raising a billion dollars, marked the coming of age of the obscure financial segment for online lending. The lynchpin of the business model of Lending Club and Prosper, the leaders in the online lending market, is mining big data in the cloud to find creditworthy borrowers and to keep default rates low.

Credit scoring is now done by a new generation of cloud-based companies, ZestFinance, Kredittech, Digital Confluence, and Kabbage. Their credit assessments use thousands of variables, including cues from social media pages such as Yelp reviews, delayed payments on utility bills, and subtle signs relating to financial solvency. They also gain access to cash flow data from Quickbooks which is a way to gauge the growth potential of the borrower.

---

As the confidence in data used for credit evaluation has increased, institutional buyers -- especially hedge funds -- have shown a voracious appetite for buying securitized loans extended to small businesses. In the past, the only small business loans that could be securitized were the ones guaranteed by the SBA. By contrast, 60 percent of the $1.1 billion worth of loans in a single quarter, disbursed by Lending Club, was snapped up by institutional buyers and they are hungry for more.


 

How the world is changing — I wonder how many small business owners would imagine that their best chance for a loan nowadays might be coming from a hedge fund?

And there seems to me some creepy implications for privacy when institutional lenders can access your social media and Quickbooks data, and take into account the Yelp reviews you get, in assessing your eligibility for a loan. 

 

Re: Innovation in banking
  • 3/22/2015 9:48:22 AM
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@Kishore. You're right about the regulations. Banks thought they had found their savior maybe 15-20 years ago when they turned to their non-regulated side of the business for growth. That was when anyone wanting to make a significant deposit was steered to that non-regulated group (often right in the same branch) so that a financial advisor could invest that deposit in mutual funds for greater growth (and commissions for the bank).

Of course there were two key results. From the dotcom bust through 9/11 and into the recession the investors were lucky just to stay afloat. And, banks no longer had the cash reserves that had been so crucial to them for more than a century. Today, at least in the consumer space, their savings account business is dead, nobody is going to trust them with retirement savings, and the consumer/small business lender products are pretty much gone, except for home equity loans and credit cards.

Re: Innovation in banking
  • 3/21/2015 12:33:39 AM
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@jamescon: The biggest problem banks have is that they are weighed down by decades old technologies and massive regulation. So there no chance that they will recover. None at all

Re: Innovation in banking
  • 3/21/2015 12:30:46 AM
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@Predictable Chaos: Great point about the emerging players. Yes, they are at the periphery but this is how new entrants gain a foothold before they can scale. They are developing new customers in unbanked domains by reducing transaction costs. In time, they will scale as Lending Club and many others in small business finance are doing. The really big area currently is leveraged loans where non-banks are cutting out banks

Re: Innovation in banking
  • 3/20/2015 10:57:36 PM
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@ Jamescon,  I suspect that at first the major banks won't care much.  The real money for them is in corporate / big customer loans.   However, if these new method proves to be profitable, I'm sure they will follow soon afgter. 

Re: Innovation in banking
  • 3/20/2015 2:14:31 PM
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@Seth. Good point about the use of social media in compiling credit reports. Given the fact that the non-bank lenders are taking different approaches in evaluating credit risk and they are operating outside of the compliance rules that commercial banks deal with, I wonder if this really is a market disrupter. It will be interesting to see how the banks respond, if at all.

Re: Innovation in banking
  • 3/19/2015 8:09:29 PM
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That's fascinating that these lenders would use social media as part of their credit score algorithms. 

The inability small businesses to obtain a loan has been an enormous drag on the economy and contributed to the lack of job opportunities for those without a college degree.  Anything that will help small business I'm a fan off.  

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