31.08.2016, 18:58
Moody's: Tie-Ups between Marketplace Lenders, Banks Can Benefit Small Businesses
OREANDA-NEWS. The partnerships that small business marketplace lenders (MPLs) are forming with banks could help them lower their non-credit costs by cutting customer acquisition costs and funding costs, Moody's Investors Service says in a report. This in turn should lead to benefits for small businesses.
Small business borrowers should experience faster access to loans that previously required long documentation and approval processes, as well as possibly lower rates due to lower MPL acquisition and funding costs. Banks could benefit from the tie-ups by increasing their lending volumes and speeding up their review and approval process for clients.
"If successful, these partnerships could serve as a template for small business MPLs and banks to partner in extending credit to an important segment of the business sector," said Madhur Duggar, a Vice President and Senior Credit Officer at Moody's. "Nevertheless, this is a nascent industry and several challenges remain going forward, including model risk and regulatory and loan performance uncertainty, " adds Duggar.
Although many small borrowers are able to borrow from MPLs, they are often unhappy about the level of interest rates that they are charged on their loans. For example, OnDeck reported in its 10-K filing with the SEC that its weighted average APR for term loan and lines of credit was roughly 41% in Q4 2015.
Moody's believes that while lending rates reflect credit risk, they are also high partially because the MPLs have higher customer acquisition and funding costs than banks do. The partnership with banks can help reduce both of these costs.
For example, in the OnDeck-JPMorgan Chase & Co. (A3 stable) partnership, small business clients that are approved by Chase can apply for loans up to $250,000 using the OnDeck technology platform. That allows them to benefit from the speed of an MPL's platform, while being charged lower rates than those typically charged by stand-alone small business MPLs.
However, despite the potential economic benefits, model risk and regulatory challenges could still stymie the growth of these partnerships. Currently, small business lending is subject to less regulation than consumer lending, but there are signs that small business lending regulation may be increasing. Further, the ability of quantitative models to accurately assess credit risk through a credit downturn is still unproven.
Small business borrowers should experience faster access to loans that previously required long documentation and approval processes, as well as possibly lower rates due to lower MPL acquisition and funding costs. Banks could benefit from the tie-ups by increasing their lending volumes and speeding up their review and approval process for clients.
"If successful, these partnerships could serve as a template for small business MPLs and banks to partner in extending credit to an important segment of the business sector," said Madhur Duggar, a Vice President and Senior Credit Officer at Moody's. "Nevertheless, this is a nascent industry and several challenges remain going forward, including model risk and regulatory and loan performance uncertainty, " adds Duggar.
Although many small borrowers are able to borrow from MPLs, they are often unhappy about the level of interest rates that they are charged on their loans. For example, OnDeck reported in its 10-K filing with the SEC that its weighted average APR for term loan and lines of credit was roughly 41% in Q4 2015.
Moody's believes that while lending rates reflect credit risk, they are also high partially because the MPLs have higher customer acquisition and funding costs than banks do. The partnership with banks can help reduce both of these costs.
For example, in the OnDeck-JPMorgan Chase & Co. (A3 stable) partnership, small business clients that are approved by Chase can apply for loans up to $250,000 using the OnDeck technology platform. That allows them to benefit from the speed of an MPL's platform, while being charged lower rates than those typically charged by stand-alone small business MPLs.
However, despite the potential economic benefits, model risk and regulatory challenges could still stymie the growth of these partnerships. Currently, small business lending is subject to less regulation than consumer lending, but there are signs that small business lending regulation may be increasing. Further, the ability of quantitative models to accurately assess credit risk through a credit downturn is still unproven.
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