More Than a Code of Ethics: Building a United and Transparent Fintech Landscape
Small business financing is more expansive and inclusive than ever before thanks to technological advances in online lending. Industry leaders have streamlined and expedited the application and approval processes giving small businesses rapid access to a host of options for capital. In this market where innovation and options abound, transparency is key. It is our duty as an online lending industry to ensure borrowers are getting all the information they need to make informed decisions.
We know small business owners are generally credit savvy. Experian’s Face of Small Business data study shows that small-business owners outperform consumers when it comes to credit management. They have higher average personal credit scores and significantly higher average credit limits. However, it can be challenging even for a sophisticated borrower to understand the myriad of financing options, terms and costs on multiple products that are often presented in different ways by different lenders. According to the Innovative Lending Platform Association (ILPA), while there are “many responsible providers and products” in the market, there isn’t a common disclosure approach among them to help small business owners compare options.
Unifying as online lenders and marketplaces in the name of transparency means cultivating a shared vision for best practices and borrower protection. It means streamlining clearer standards for disclosing pricing information. Plenty of providers, platforms and organizations have codes of ethics in place that promise fair treatment, responsible lending and disclosure from agents and brokers. But, it will take more than a series of codes of ethics to build a transparent fintech landscape made up of honest providers committed to protecting small business owners.
First and foremost, all terms of a financing product need to be fully disclosed and easy to understand. According to a 2016 ETA survey, the majority of small business borrowers look to minimize total loan cost when facing a short-term return on investment opportunity. They are focused on the loan cost for every dollar borrowed, loan annual percentage rate (APR), total fixed fee and interest expense. They want to know how much money they’re getting, when payments are due and how much total money they will have to pay back.
Historically, some borrowers have been surprised or intimidated by high APRs on short-term financing products (which don’t make a lot of sense for such products), early payoff penalties, schedules of payments where a daily payment is required, processing fees, late fees, recurring fees, origination fees, terms of default, net proceeds available and even the total cost of the finance product.
Business owners should never be caught off-guard by these details once a loan or other financing product has funded, and while the legal documents include such details, oftentimes borrowers are still walking away with questions. There needs to be an industry-wide standard in place for the best practice of clearly communicating the total costs of business financing products. Where brokers, agents and marketplaces are concerned, the same standards apply. There should be a clear and transparent presentation of the best options and offers available to a borrower.
One way to promote this type of transparent and responsible lending within the fintech space is through mandated regulation. While regulations are sparse when it comes to disclosures, several state and federal agencies are investigating whether to apply mandatory financial disclosures to the fintech industry. Another way to promote transparency is through trade organizations that advocate for the lending and service companies that serve small businesses. Earlier this month, two such organizations announced plans to join forces. The Coalition for Responsible Business Finance (CRBF) and the ILPA will operate together as the ILPA and will continue to promote the success of small businesses through advancing best practices and standards for responsible innovation in online lending.
Members include OnDeck, Kabbage, CAN Capital, Breakout Capital, Enova International’s The Business Backer, PayNet and Orion First Financial. The ILPA is designed to promote responsible lending and increased access to capital for Main Street businesses. The group also focuses on advancing standards within the online lending industry, pushing for more cross-industry solutions to promote transparency and improving access to capital.
One of the ILPA’s biggest initiatives, SMART Box (Straightforward Metrics Around Rate and Total cost), is an easy-to-read, standardized disclosure document for loan pricing and comparison launched in partnership with the Association for Enterprise Opportunity. Released last fall, SMART Box is designed to help small businesses assess and compare finance options, and several lenders have already started using it. The document uses a comprehensive set of pricing metrics that tackles the APR, total cost of capital, cents on the dollar and factoring. It is not intended to replace a lender’s current loan disclosure information, but rather supplement it through easy-to-understand language identifying a loan’s key pricing information.
As more and more industry players unite in an effort to provide clear and standardized disclosures, it will not only help to protect and serve the needs of small business owners, it will further the growth, evolution and innovation that has shaped the online lending industry to date.