Looking for additional insight into the challenges the industry CI reached out to an industry insider for their perspective on Fintech lenders letting employees go. Their response was as follows:
“In a way, OnDeck and any other small business lender’s fate was sealed not all because of COVID-19; but also largely due to a new competitor coming on the scene with unlimited lending capacity at 0% APR. Namely, the United States government. The US government [has] dished out trillions of dollars to small business owners (especially the legit ones) that the only “businesses” left for the picking by OnDeck are un-fundable junk businesses that no one wants to touch. This is a sad situation and unfortunate for those that worked to help millions of American small business owners. In the end, no one can compete with the government’s purse string.”
The Law of Unintended Consequences
So it appears that the government programs that are designed to backstop the US economy are, unintentionally, adversely impacting online lenders in the SME sector. This person said the simplest way to put it is this. The government is the new lender with trillions of dollars of funding power at virtually no cost to the borrower. How does anyone compete with that?
“In essence, the government’s Paycheck Protection Program (PPP) ultimately kills all small business lenders. There is another unintended consequence, the good, and real businesses are getting PPP funding,” they explained. Whereas the bad ones that don’t qualify for PPP, neither would the OnDecks of the world want to lend to them.
“OnDeck might still be getting a ton of applications for funding, but most of them are un-bankable. The good PPP program is a bad thing for private small business lenders.”
We asked about other online lenders in the SME sector that may be in a similar situation. This person said that layoffs are occuring across the board, mentioning names like Funding Circle and Kabbage (previously covered), who are laying off hundreds if not thousands across the sector.
“Many will fail in the coming weeks or months. It will be a bloodbath, not too dissimilar to the great downturn in 2008-2009,” this individual warned.
Do you think some of these platforms will be able to survive? Are they able to access some of these programs too?
“Many of these small business lending platforms will not exist in the coming month. First, I think half of the small businesses won’t come back to their pre-COVID level. Some will go out of business completely. What’s interesting is that there is so much disinformation out there, and every bank that backs the PPP program has its own underwriting criteria. Why? Because if they don’t underwrite these businesses correctly, they are on the hook to repay some if not all of the bad loans. Some of these banks are saying that Fintechs and lenders are not qualified for PPP. You may also wonder why Cross River Bank got millions from the government, well, they don’t just dish out PPP loans, they do a lot more than that. The pure lenders may be out of luck and going belly up.”
And what about consumer lenders? A different segment of Fintech that has also been impacted by COVID-19.
“Consumer Lenders [may] have the exact same fate as small business lenders. They are competing with the government again and losing badly. The unemployment checks are raining down and most people make more money sitting at home than go back to work. There are so many unintended consequences, it will take years for us to learn from this. In the near term, smart consumers are using this money to pay off their debt creating a massive wave of prepayments. That sounds great for the consumers, but lenders absolutely hate prepayments, their yield erodes and profit falls. It’s a sad day all around.”