At one point, Kabbage developed partnerships with banks that saw its technology propel small business lending in seven countries.
These relationships are hard to maintain, and it’s hard to teach leaders the importance of taking ownership of the customer experience. There were plenty of opportunities in the United States, and Kabbage developed a suite of cash tools to help small businesses.
“There was nothing like it for small businesses in the United States,” Petralia said.
She said America has 30 million small businesses, 80% of which employ fewer than 10 employees. Together they are a powerful economic force, but they are underserved by service providers.
Kabbage has begun to focus on simplifying finance functions for these entrepreneurs, who are time-poor and don’t have the luxury of being CFOs, Petralia said.
They need basic operating systems, checking accounts, payment and bill processing, and bill payments.
Petralia said a payments product was launched before the onset of the COVID-19 pandemic, perfectly positioning Kabbage to process the second-largest volume of PPP loans in the program’s first run. The average loan amount they processed was $11,000.
“It was a really exciting time for us to be able to serve these small businesses,” Petralia said.
In August 2020, Kabbage was acquired by American Express and began developing new products, still focusing on smaller businesses.
Few companies seek to meet such needs, she said. Bigger players like Square and PayPal are more monolined, but some newer ones like Wayflyer and Pipe show promise.
Petralia noted that many companies use external data sources to help evaluate apps, something Kabbage has been doing since their inception in 2008.
“What’s old becomes new again”
Few lent during the first 12 to 18 months of the pandemic. Add government relief and there was a lull. Then came the K-shaped recovery where some sectors, including many restaurants and retail establishments, fared well, Petralia observed.
Many of these successes are the result of careful adaptation, some developing an effective online strategy, others instituting delivery services and others leveraging social media.
While some businesses have sat on PPP money or used it to pay off higher-interest loans, Petralia said many small businesses need it to keep their lights on. Some even returned the money because they didn’t need it. Many had a problem: the rules were constantly changing, which made the criteria for forgiveness unclear.
Digital finance grew because people couldn’t go to a bank for a long time. This hurt small business operators who couldn’t make mobile deposits from their phones for business accounts.
A common observation from industry watchers is to expect more partnerships between fintechs and banks as the latter seek to play digital catch-up and the former to growth.
It depends on the particular niche the fintech operates in, Petralia warned. BBVA closed a pair of costly acquisitions that failed to pay off. She sees most of these partnerships succeeding in banking services and basic infrastructure.
Small business interest in crypto is also low
Are small businesses very interested in cryptocurrency? Petralia has not heard from many customers who want it. Small business owners already take on enough risk without facing volatility.
Petralia admitted it was in a strange position during the pandemic, given the sale of Kabbage and the launch of PPP financing. This has left many lenders unsure of how to proceed.
She said she was watching inflation closely, which will have a significant impact on small businesses, with customers telling her the price of some items has doubled in price in recent times. Supply chain issues will also persist. The full effect of some of these factors has yet to reach the consumer.
Kabbage has long used fully automatic, real-time access to third-party data as well as machine learning models, Petralia said.
“It surprises me that there have been few other Kabbages.”
Is secure, multi-party computing a process that can allow competitors in the same space to collectively benefit from each other’s data without seeing it as an option as companies seek to refine their lending models? Only if everyone participates, Petralia said. Otherwise, you are only looking at a piece of the pie.
The data challenge
A challenge in financial services, especially on the consumer side, is that so little real data is available due to provisions of the Fair Credit Reporting Act, Petralia said. This law protects information collected by consumer reporting agencies such as credit bureaus, medical information companies and tenant screening services. The information cannot be provided to anyone who does not have a purpose as specified in the law. Companies providing information to agencies have obligations, including to investigate disputes.
“Facebook doesn’t want to be a credit agency,” Petralia said.
Will the open banking movement have a revolutionary effect as it heads west? For now, Petralia reserves judgment. She noted that fewer people than expected in Europe were changing banks. Companies must also educate consumers about the benefits of the process. The user experience must also be superb.
“Hopefully we have a better plan for how this is going to be useful,” Petralia said.
The BNPL craze also fascinates her. She said it was nothing new and similar to what was on retail branded card products.
“The fervor that surrounds me puzzles me,” Petralia concluded. “How many new BNPL companies can there be? »
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Tony Zerucha is a longtime contributor in the fintech and alt-fi spaces. Twice nominated for LendIt Journalism of the Year and winner in 2018, Tony has written over 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has moderated panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong.