Small Business Lenders At a Crossroads – A Cautionary Tale From the Fight Over Payday Lending
By Kevin Kimble – Co-founder Financial Service Innovation Coalition (FSIC)
As someone who follows trends in the financial services sector, especially as they relate to nonbank activities, I have been watching with great interest all of the discussions surrounding the new generation of innovative small business lenders and the need for them to be proactive in the regulatory and legislative space. At FSIC, we noticed this trend toward new models of small business lending early and held a roundtable entitled: “Microlending, Factoring, and Peer-to-Peer: How Innovators Are Helping Small Businesses Cope With The Credit Crisis” last spring on Capitol Hill. We brought in Kabbage, Prosper, Equifax and other players who were experiencing significant growth to discuss the capital needs of small businesses and those seeking to fill those needs.
Fast forward, one year and the marketplace is booming, with billions of dollars being lent and new lenders popping up each day it seems. This plethora of activity is reminiscent of the go-go years of the payday lenders. Filling a desperate need for cash to those left out of the system, the payday lending market place ballooned to unimaginable heights. As with any red-hot market, the quality control can be sketchy and a few bad apples can bring the wrong kind of attention to an industry. Many payday lenders were overly aggressive in the loans they made, in the collection efforts they used, and the legal premises under which they operated. These lenders as a whole ignored the legitimate complaints and worked tirelessly to frustrate efforts to find regulatory and legal compromise. As a result, the payday loan industry and its customers have suffered from a lack of credit opportunities because of restrictive State and Federal regulations. Had the industry been willing to work with these authorities the dialog may have resulted in a better solution.
If they are not careful, these new small business lenders will suffer a similar fate. The complaints of unfair practices and outcomes are starting to get louder, yet the lenders have not come to the table to discuss what is being done and what more can be done to protect the borrowers while also giving them access to credit they desperately need. These lenders like the payday industry tout that their defaults are in the 5-6% range, which may be acceptable, but what happens to those 6% when they default. If 5% of planes crashed or cars caught fire, there would be a swift move to correct the problem. Similarly the sometimes heart wrenching tales of those who default on these loans are making their way into the media and will eventually require a response, much as it did with the payday lenders. The response from some state regulators put many payday lenders out of business and even the largest lenders were subject to corrective action by the CFPB.
In short, the maturing small business lending industry must do more going forward to create a public discourse highlighting how their innovative lending models really help small businesses thrive. They must also be open to making changes to address legitimate concerns. If they fail to do this, then they will likely find themselves in the same crosshairs as the payday lenders.
Kevin B. Kimble is the Director of Policy Development for the Financial Services Innovation Coalition (FSIC), and brings over 20 years of experience in public affairs to the FSIC team. As the principal of the KBK Consulting Group, Mr. Kimble acts as an advisor to various financial services companies. He has been featured in Ebony magazine and the Jordan Goodman “Money Answers” radio show among others.
