Yesterday morning a subcommittee of the House Committee on Small Business conducted a hearing into the small business lending environment. The subcommittee heard testimony from a variety of experts including Renaud Laplanche, CEO of Lending Club. This is the first time an executive from one of the peer to peer lenders has been invited to testify in Washington DC.
The title of the hearing was Where Are We Now? Examining the Post-Recession Small Business Lending Environment and as expected it was mostly focused on traditional bank lending. That is understandable given that the vast majority of small business financing is still provided by banks. But the fact that they invited one of the leading alternative lenders showed a coming of age of sorts for the industry.
In his opening testimony Laplanche made a couple of interesting points. The first was that based on their credit performance small businesses should be getting more access to credit, not less. Charge-off rates on small business loans peaked at 3% during the financial crisis compared to 10% for consumer credit. The second point that I found interesting was that very small businesses, those with 2-4 employees, were struggling the most to get access to credit – with a 46% decline in bank loans from 2009-11.
During the question period, Laplanche was asked exactly how Lending Club is able to reduce underwriting costs. Before he answered that question, though, he made an interesting point. He said that no underwriting process would ever be better than the relationship between a community banker and a small business owner. This was likely made to disarm both the members of the committee and the bankers on the panel who might have been suspicious of this new upstart elbowing in on their turf.
Using Technology to Make Underwriting More Efficient
Laplanche then stated that Lending Club was not taking business from banks, but was really filling a void where these aforementioned relationships did not exist or where the bank loan application was unsuccessful. And this is where technology comes in. Here we gained a little insight into how Lending Club was going to underwrite small business loans.
Technology will be used to help small business underwriting in two ways:
- Aggregate financial data – For example, those businesses that use Quickbooks Online, Lending Club could hook up with the Quickbooks API and pull in all the financial data of the business very quickly and easily with minimal involvement from the business owner.
- Alternative data sources – Collect and analyze data from customer satisfaction sites like Yelp, OpenTable and Angie’s List that can help supplement financial data.
Later, when asked to expand on this Laplanche said that Lending Club has created their own credit review center that aggregates data from 25 different sources. In addition to the three data sources mentioned above Lending Club will also look at Facebook data, Twitter, UPS and Fedex shipping data.
A couple of other interesting tidbits Laplanche shared during the Q&A session:
- Lending Club now has seven community banks participating as investors on their platform, up from the two that were announced in June of this year.
- What Lending Club would like the government to do is make more data readily available to underwriters such as IRS data to easily access tax filings (with permission obviously) and not leave that burden on the small business owner.
Overall I was not very impressed with the hearing. The chairman of the committee was clearly focused on Dodd-Frank and its negative impact on small business lending and no one seemed all that interested in the new ideas that Laplanche presented. I thought we would get some more in depth discussion here and how everyone, small banks included, could use technology to make underwriting more efficient. But that discussion never materialized.
The entire hearing was over in less than 90 minutes with no clear takeaways by the committee. It was certainly a long way for Laplanche to go to answer three or four questions and sit in a committee room for an hour and a half. But at least it was good from a marketing perspective – Lending Club was considered important enough to come and testify in the first place.