Analysis Featured

How Online Lenders Can Reduce Default Rates, Increase Margins, and Remain Competitive


In recent years, the SME lending ecosystem has evolved at a rapid pace. As more competitors entered the market, there has been an interest rate reduction across the board. After the 2008 financial meltdown, the market tilted toward a more conservative credit outlook causing default rates to fall and start-up rates to decline.

SMEs employ more than 50 percent of private sector employees and generate 65 percent of new private jobs. They also represent 98 percent of U.S. exporters and 34 percent of U.S. export revenue. When banks withdrew from the lending sector after the financial meltdown, alternative lenders stepped up to capture the $4.4 trillion dollar market. Still, there is latent demand for affordable pricing and a time-sensitive, hassle-free experience for business borrowers, leaving the market under-penetrated. PayNet rose to fill this need by helping lenders mitigate risk and leverage alternative credit data.

More than just a credit agency, PayNet measures the health of a business using sales, production, and other business data, provided mostly by lenders who in return gain access to an overview of global credit information.

Why It’s So Hard for Alternative Lenders to Compete

Banks have better access to customers due to regular deposits and other banking activities. Online lenders, however, must use innovative channels to reach their customers. Instead of cutthroat competition to steal each other’s business, online lenders look for creative ways to compete. One approach used involve aggregators, which act as middlemen for the lender and the borrower. Another approach is bank partnerships. For the market to grow, everyone needs a common view of the system. While there is enough business to go around, the most important thing is to build a robust system that will help the industry grow.

A slowing economy and a small secondary market are two other reasons it is hard for SMEs to access capital. A few marketplace lenders have joined the SEC, but not many. A lot of lending companies are struggling due to inability to compete at scale. Securitization is gaining momentum, but because there are so few players, it is still at a nascent stage. In recent years, the mortgage market has become more sophisticated and serves as a great opportunity for borrowers. But because of the emergence of new players, there is more standardization. It took lenders a few years to understand the importance of brand and consistency. As a result, they have now offer recognized products with more consistent terms. PayNet envisioned this long ago and developed products like the Small Business Lending Index and the Small Business Delinquency Index to help companies optimize the underwriting process.

How PayNet Solves the Problem for Lenders

PayNet has always been an advocate for equality and industry best practices. Hence, they are a member of a coalition formed by lenders in favor of transparency. PayNet intends to help the CFPB understand the small business market and lending industry disparity so the CFPB can create better regulations.

To stay true to its reputation, PayNet developed MasterScore for the alternative lending market, the first of its kind. Other companies are trying to replicate the model or make one of their own. MasterScore data was taken from FinTech companies in order to reduce the lender default rate.

Headquartered in Skokie, Ill., PayNet opened its doors in 1999. Founder Bill Phelan holds a CFA degree. Prior to starting PayNet, he managed fixed income securities for Trustmark Insurance Company. He also advised privately-held companies on acquisitions and valuations. Under Phelan’s leadership, PayNet has grown into a firm with the largest collection of commercial loan and lease payment histories. The company has collected data on more than 23 million privately held businesses in the U.S. and Canada including their cumulative GDP. Using a subscription-based model, PayNet has realized a 10x return on investment while transacting more than $200 billion in business.

Because Fintech offers quick accessibility to cash and lenders, all kinds of borrowers apply for credit. On the other hand, lenders want more loan applications. With PayNet, they can demystify borrower creditworthiness in a few minutes. All they need to do is enter a name, address, or business name and all the information they need is at their disposal.

With delinquencies on the rise and increasing default rates, there is a growing need for online lender vigilance and caution. Therefore, PayNet is a strategic product essential for lenders to ensure default rates do not destroy margins.

Written with Heena Dhir.


Allen Taylor
Allen Taylor


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