Scaling Up Microlending in California
Disruptive Technology
Download Susan Brown’s powerpoint: MicroLenders Forum on Disruptive Technology.
The recurring theme: how to incorporate the new norms in lending brought on by technology into our high-touch/community-based approach so that our organizations are sustainable and we scale microlending. According to Paul Quintero of Accion East, because of our mission,” we will never be a pure play imitator of what the for-profit alternative lenders are doing.” But Paul is implementing lots of new technology at Accion.
Despite their crucial role in the economy, less than 1% of potential microbusiness borrowers are being served. In California, CAMEO’s microlenders struggle to achieve scale. Microlending is expensive for many lenders to sustain and as a result, some of CAMEO’s lenders have left the microloan market. Our 28 member lenders made 1,500 microloans in 2012. And as our friends at California Reinvestment Coalition reported “bank lending to small businesses shows only the barest improvement since 2009.”
Simultaneously, new players, new technology, and seismic shifts are new forces in our industry. New internet-based technology is changing the microlending process, allowing for cost reduction, increased efficiency and volume. New players into the field means increased competition for loan ready borrowers. Just so happens, the day before the forum, The Wall Street Journal posted an article “Alternative Lenders Peddle Pricey Commercial Loans; With Credit for Businesses Tight, Nonbank Lenders Offer Financing at a Price” (it is behind the pay wall.)
This year’s MicroLenders Forum explored these changes, how they affect us, and how CAMEO can help smooth the way.
In preparation for the Forum, we asked the Stanford University Microfinance Research Group to survey the landscape and describe what our members are facing. Luis Armona, a senior and president of the group, presented “Big Data Meets Microfinance” and explained what machine learning is and what big data can do. He believes machine learning will only get better and that big data will seep its way into the market, but that is the direction of lending. The conclusion was that our members must pay attention and prepare for the future – as big data allows for massive economies of scale and the new products are very consumer-friendly. However, the tradeoffs are high interest rates and a low-touch process.
Next up were two panels that talked about the disruptive technology and how its affecting microlending and possible responses and issues to think about. You can download a detailed description of the New Players Panel and the Bankers Response including product descriptions of each of the lenders and how Accion East may be a resource. What follows is a summary.
The new players included:
- Tom Green, Lending Club
- Brad Lensing, Prosper Marketplace
- Leslie Payne, LendUp
- Paul Quintero, Accion East
They are using automation, big data, and crowdfunding to break into California’s microlending market. It was clear that the new norm in lending is very quick loan approvals (or denials) with a stripped down application process. Using data and technology efficiently allows these firms to assess their risk almost immediately. They stagger information request and only collect documents if the borrower qualifies for a loan. Money can be distributed in days, not months. Customers expectations are altering in the microlending market to coincide with these new options. However, these lenders are only reaching the top 10% of borrowers. The big questions of the day were:
- how to reach the other 90% of borrowers? and
- can the for-profits partner with the non-profits to bridge the gap?
Paul Q. challenged our field to re-assess pricing and focus on a niche. On pricing: the interest rate should equal expected loss plus cost of funds plus operating costs; if an organization is not charging enough then the funders are paying for risk. On niche: the marketplace is going to force a decision on how to compete; define three-to-five segments and focus efforts because we won’t be the quickest or cheapest, so we have to be the most suitable.
According to Fred Mendez of Rabobank, technology is something that should be embraced.
How will you choose to connect to these platforms? … If you choose not to partner, this room will be empty fast.
Other salient points:
- Only do what you have to do, you don’t have to do everything (as in you can automate your underwriting, but can’t automate your personal touch).
- Provide what you do best, let others do what they do best (as in use high touch when it makes sense).
- Technology redefines what people do.
- Prioritize what requires philanthropy (e.g. technical assistance), but grant funding is not sustainable.
- A trade off exists between pricing risk and rationing credit.
In the afternoon, we presented two new game-changing tools – i.e. the disruptive technology – that have proven effective in reducing the costs of technical assistance and increasing loan production. The first was a Mobile Entrepreneurship Toolkit developed by Centro Community Partners. The toolkit consists of a loan readiness assessment tool and a business plan tool that has decreased the cost of technical assistance by 80%! The second tool is the Microloan Management System tool that CAMEO brought to its members as a way to decrease the cost of microlending. Women’s Economic Ventures reports that using MMS allows them to double the number of loans they are processing.
CAMEO, as the effective small business CDFI coalition for California, supports the growth and sustainability of microlending in California. We feel that it’s our role to bring forth these new trends and technology and to support our members to expand their capacity, skills, capital resources and technology adoption. To that end, CAMEO introduced a new program at the Forum — The MicroLending Academy. We believe that it will be well-received as members expressed the desire for CAMEO to continue to provide training and support around best practices during the members-only discussion. Something that CAMEO will explore for the future is other platforms – as in a HUB for backroom services or helping members to onboard/partner with one of the existing for-profit alternative lenders or developing a platform to serve the 90% – that will help decrease costs and increase productivity.