SMART box, an initiative started by OnDeck, CAN Capital, and Kabbage voluntarily, will provide small businesses with a standardized pricing comparison tool across all SME credit products. SMART box will allow businesses to easily compare different products from different credit providers in a simple and organized way to enable an “all-in” pricing for the 20, and growing, number of business credit products that already exist.
The need for self-regulation
The Treasury, SEC, FTC, OCC (office of the comptroller of currency), all have released white papers/reports on alternative lending in general and p2p lending in particular. The p2p market has caught everyone’s attention; from Silicon Valley VCs to Wall Street banks and ultimately the regulators. The industry has been helping the deserving get credit when the banks just vacated the consumer credit and small business lending space due to various reasons. There are also reports of ponzi schemes, usurious interest rates, and fee abuse even for borrowers who are not able to pay on time.
Sooner or later, the SME lending industry would have to be regulated. The big question is whether the framework was going to come from inside the marketplace lending space or will it be imposed by the “Big Brother”. SMART box was launched by the Innovative Lending Platform Association, in partnership with Association for Enterprise Opportunity to exactly pre-empt this situation. SMART box is an initiative predicated on creating a transparent small business lending ecosystem.
Lendio joining the SMART box initiative
Lendio, the marketplace for small business loans, announced on Wednesday July 13th that it will join industry leaders as an early engagement participant in supporting the model small business lending disclosure called the SMART box. As a first step, Lendio is participating in a 90 day national engagement period, where along with other industry players they will discuss and try to find out how SMART box should work. The objective is to identify 2 or 3 metrics that will allow to compare effectively all products from term loans, to factoring, via merchant cash advance, inventory financing and all the remaining 20 or so SME credit product types.
Lendio is a free pure marketplace aggregator with about 75 institutional and fintech lenders on their platform. It is evident that Lendio would love to have transparency as it will be able to offer an industry standard comparison tool to enable prospective borrowers to compare the deals they receive from all the 75 platforms. The clearer the pricing the better the chance of a user comparing different loan options which benefits marketplace aggregators like Lendio.
The industry associations
The founders of Lendio feel there are 5 to 7 different associations having similar principles and goals in the SME lending space. By having multiple associations who all have similar targets with small differences, the resulting discord dilutes and fogs the overall target. Lending Times and Lendio feel that a merger of all similar associations, with a single goal of creating a self regulatory body for SME lenders, will have much more success and will drive a much larger industry adoption.
Similar self regulatory efforts were successful in the commodities trading space where the National Futures Association (NFA) is a self-regulatory body which regulates Future and Commodities Merchants ( FCMs), instead of the CFTC. In comparison, retail currency brokers were unable to organize themselves and as a result Congress forced Retail Foreign Exchange Dealers ( RFED) to be regulated by the NFA, a misfit which led to a reduction from 300 + RFEDs in 2008 down to 5 entities in Q4 2015.
While consumers are familiar with annual percentage rate (APR), SME credit products are not all well represented by an APR. Many SME executives use other metrics to gage their repayment capability and cost of credit. In fact, most SMEs care more about cash-flow than APR.
The SMART box initiative is presently conducting surveys to identify the best possible metrics that will in the same time be simple, understandable and will cover the large SME credit product universe effectively. SMART box will consult nonprofits, regulators, associations and other relevant stakeholders in the community. Lendio feels that there is no one single metric for small business lending that can be used on every credit product. The CEO of Lendio is excited to join Smart Box precisely because the initiative has the nuanced view that there might be a need to have two to three different metrics in order to be able to compare term loans with products like factoring or merchant cash advance.
Kabbage, OnDeck, CAN Capital, Lendio , Lending Tree
Kabbage, OnDeck, CAN Capital, Lendio, and Lending Tree are all part of the SMART Box initiative. To date there are about 20 participating members in this effort. Lendio is also inviting all their 75 partner lenders to join the effort. All lenders should be part of the decision-making process. This will ensure everyone’s buy in with the resulting tools and metrics and that everybody’s products are taken into account.
Benefits of SMART Box
The future effects of the initiative could have larger consequences than one could cursory expect. One school of thought believes that a transparency tool will benefit the cheapest product. However, cheap is not always good and never a good fit for everybody. Transparency will also demistify complicated products.
In all cases consumers will definitely benefit because of the enhanced disclosures and established industry best practices. Consumer satisfaction relaxes the regulator’s urge to force regulation to the space. In general, regulation is best setup by the space’s own partipants with a good long term vision who understand that ethical business behavior is much more profitable than short term abuse. Perhaps SMART box will allow to drive the industry in this direction.
This will also help lower the cost of capital as investment funds, insurance companies etc would be more comfortable in putting their low-cost long-term money into fintech lending when there is no regulatory overhang on the sector.