by Sarah Todd – June 22, 2014

Banks and alternative lenders sometimes cast themselves as partners in helping small-business borrowers, rather than rivals competing for the same customer. But at a summit on new offerings in this area, one small-business advocate couldn’t help but pit the two groups against one another.

“This is innovation,” William Dennis, a research fellow at the National Federation of Independent Business, declares after hearing from a panel of alternative lenders. The session included representatives from PayPal, Kiva, OnDeck Capital, Lending Club and CAN Capital. “This is the kind of thing we really need to do,” Dennis says. “Do more of it.”

In contrast, an earlier panel featuring executives from American Express, JPMorgan Chase and Goldman Sachs “didn’t show us much innovation,” Dennis says. They had mainly talked about offerings like Amex’s OPEN credit card for small businesses and Goldman Sachs’ efforts to make capital accessible to entrepreneurs via partnerships with community development financial institutions. “That’s no judgment on the efficacy of what they discussed,” Dennis says, “but it’s not very innovative.”

Some innovators in this market, however, have been running afoul of regulators and consumer advocates. So the Federal Reserve Bank of New York invited a cross-section of lenders, policymakers and entrepreneurs to the May event, to discuss how to facilitate innovation and credit availability while curbing risk. The proliferation of online lenders in the small-business space was a focus, with conference goers generally speaking optimistically about these firms’ potential to spearhead progress.

Alternative lenders frequently offer a faster approval process; many tout automated, streamlined underwriting functions that draw data from sources ranging from borrowers’ online bank accounts to their social media networks. But online lenders have one major drawback compared to banks. Their credit products are often accompanied by high fees and interest rates. Such costs are “sucking the health from a lot of good businesses,” says Rohit Arora of Biz2Credit, an online business loan marketplace.

The average annual percentage rate on loans that online lender OnDeck recently packaged into bonds to be sold to investors was 54%, according to one report.

“APRs somewhat distort the true economic costs” of loans, argues Andrea Gellert, a senior vice president at OnDeck, who adds that some borrowers will gladly take on higher interest rates for a shot at generating greater returns. But she says OnDeck is working to bring borrower costs down as it builds scale.

Steve Cohen, the deputy commissioner of New York State’s Empire State Development Agency, urged alternative lenders to share their metrics publicly, so banks and policymakers can learn from their success. If newfangled approval techniques result in reasonable write-off rates while benefiting the economy, Cohen says, then small-business lending may well transform.

“It’s going to get some folks thinking about their own ways of underwriting these deals and get policymakers thinking about putting greater and greater dollars into this environment so that the industry as a whole can grow and innovate,” Cohen says.

To read the original article, click here.

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