Few sectors of the US economy have been more effected by the pandemic than small business.
Collectively, America’s 5.5 million employer small businesses represent 52% of jobs. A typical small business holds only 27 days of cash on hand, leaving few in a position to weather a severe or long-term shock, such as the magnitude of lost business caused by covid.
Just as these small businesses have endured a big hit, so have their lenders. Whereas large businesses often rely directly on financial markets for capital, small businesses are more likely to rely on loans from banks and fintechs.
News from OnDeck Capital and Kabbage, prominent small business lending platforms, exemplify the damage. OnDeck has seen its share price drop by over 80% since mid-February as defaults spike. Kabbage, meanwhile, has suspended lending altogether and has furloughed a significant portion of its staff.
Andy Beck, a fintech veteran and product leader in SMB finance at ForwardLine, and previously at B2B consumer lending platform Amount, joins to share his view.
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Mack: Welcome, Andy. You’ve had a front row seat to this crisis while developing financial products for small businesses. What do you see as the future of small business lending?
Andy: For mainstream SMB lending, I expect there to be multiple firm closures and consolidations, and possibly a long-term fundamental shift into different products. Many pure SMB lenders don’t hold many of their loans on balance sheet. A dramatic rise in defaults is catastrophic for their businesses – expect them to be for sale as a result.
Additionally, many SMB loans and LOCs [lines of credit] are for 6-18 month terms. The crisis could easily last that long… a portfolio will run off very rapidly with limited volume replacing it.
What I expect is like in so many areas of society an acceleration of trends that were happening anyway. The fastest-growing SMB loan portfolios were coming from companies like Square and PayPal that had existing relationships with small businesses from other products. They are well-situated to pause lending, ride out the pandemic, and get back into it once things have settled into a new normal. Coming out of the crisis I expect them to hold much more market share than we would have expected just a few months ago.
Mack: Indeed, the impact is falling quite differently across fintechs. You've worked across a number of types of fintechs, including consumer and small business finance. What types of fintech business models do you see as most and least resilient in this crisis?
Andy: The obvious answer is SMB lenders are in rough shape and consumer lenders will do better. Though the reality is more nuanced.
Businesses that are diversified across a few different product lines are certainly in stronger position, where they can back off something that will be in rough shape for a year and focus their energy on things that are working. Monoline lenders will struggle; whereas a company like Square – with revenue from payments, POS, lending, and more – will be OK.
The infrastructure players are probably in better shape, but not completely. Someone like Plaid – they power experiences across lending, investing, etc – again their diversification helps them. On the other hand, selling infrastructure exclusively into financial institutions probably isn’t so attractive at the moment.
Mack: Given the many dark headlines of our times, what currently gives you optimism within the fintech industry?
Andy: The fintech industry has extremely smart people that have proven themselves capable of innovating in a number of areas over the past decade. 99% of the innovation in financial services has come from fintechs. And, so do I expect that big pool of human capital to figure out how to survive and thrive in the crisis and coming out of it? Yes, I do, and I’m excited to see what people come up with.
Mack: As you settle into social distancing and working from home, are there reports, books, or articles you’re reading during this time that you’d recommend to others?
Andy: I haven’t changed my “media diet” substantially, but one person I’ve started reading is Nathan Tankus. He is delivering super smart, in-depth knowledge on what the Fed is doing, how it affects the macroeconomy, and deep dives into the specific mechanics of how their actions propagate out to main street in more detail than anybody else. He’s a good person to check out.
Other people I’ve found essential are the Marginal Revolution folks and Balaji Srinivasan, though that hasn’t changed since before the pandemic. That’s more for general goings-on vs fintech specifically.
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