Banks Offload Pesky Small-Business Services onto Fintech Startups

Jamie Dimon spoke for a lot of bankers when he said recently that there is certain "stuff we don't want to do or can't do" anymore.

The JPMorgan Chase chief was talking about small-business loans offered through marketplace lenders like OnDeck, with whom his bank announced a partnership later that day.

Not that JPMorgan does not make small-business loans. To the contrary, each of the last three years it has extended at least $19 billion in new credit to small companies.

But this partnership, like similar ones taking place throughout the industry, will give the bank a relatively painless way of serving small businesses, some of which it might not otherwise reach. In a survey of 250 small-business owners conducted earlier this year, 53% said they had applied for business funding or credit lines in the past five years, 20% said they had been turned down, and 23% of those said they did not know why. More than a quarter said they had avoided hiring and expanding because of the difficulty of accessing funds.

Banks say it can be hard to assess the creditworthiness of the 27 million small businesses out there, especially young companies that lack accounting statements and verifiable revenue streams. Also, small-business owners tend to want advanced banking services and to avoid fees.

Through fintech partnerships, banks can offer services to small businesses and let a third party take on some of the risk, effort or expense. JPMorgan's relationship with OnDeck, and a new partnership between Bank of America and Viewpost, are cases in point.

"Banks don't want their cost to service the customer to go up, so they are looking for products like these where there's a self-service, hands-off offering," said Patricia Hines, senior analyst at Celent.

JPM and OnDeck
JPMorgan's deal with OnDeck is a bit unusual. While many banks have partnered with marketplace lenders like Lending Club and Prosper to buy loans, JPMorgan will use OnDeck's software, data-gathering methods and to some extent its algorithms to assess some small-business loan applications. The loans will be made under the bank's brand, the final decision about whether to extend credit will be the bank's alone, and the loans themselves will stay on JPMorgan's books.

"Partnering was a faster way to accomplish what we want to accomplish, which is a streamlined, super-fast, disruptive-customer-experience way of delivering small-dollar credit [up to $250,000] to small-business owners," said Mary Jane Rogers, chief communications officer at the bank. She also noted that these will be prime loans made using JPMorgan's credit policy and pricing. (OnDeck's loans have rates as high as 98%.)

The two companies will jointly develop a platform that lets the bank make credit decisions based on some of OnDeck's data.

The big difference with the OnDeck-enhanced loans will be customer experience, Rogers said.

"The small-business lending process isn't known to be an easy one," Rogers said.

These loans will be offered online, initially by invitation only. Approvals will be made, ideally, in minutes; the funding will happen within a business day.

B of A and Viewpost
Will Barr, small-business deposits executive at Bank of America, oversees $80 billion in deposits for three million small-businesses, which the bank defines as establishments with less than $5 million in annual revenue. To help those customers manage their cash flow, he formed a partnership with Viewpost, a fintech startup based in Maitland, Fla.

Viewpost has created a service that automates small businesses' billing processes. It already works with U.S. Bancorp and Fifth Third Bancorp.

B of A was scheduled to officially launch its version of the service Thursday.

The way small businesses deliver and pay invoices can be opaque, with the biller sometimes not knowing if the client even received the invoice, let alone when it plans to pay up.

"That friction prompted the creation of Viewpost," said Max Eliscu, Viewpost's founder and CEO.

Viewpost is building a network of small-business payors and payees, through which users can track the status of invoices the way Federal Express or UPS customers track their packages. Payors can pay debts early to receive a discount from payees that need the cash-flow help. Billers can get a much clearer sense of when they will get paid; and banks can gain insight into their customers' working capital and help them manage their cash flow, for instance by helping them move money around when there is an anticipated shortfall. Eventually the bank could use this information to inform lending decisions.

Viewpost tries to make the service free to users. It makes money through a cut of the savings companies get by paying early. It also charges 75 cents for cutting and delivering checks to those who opt in to that service (so they do not have to keep check stock on hand, and so they could set up a payment from a job site or in transit). Trading partners that join Viewpost can have payments deposited directly into their checking account for 50 cents per item. Recipients are not charged anything.

"In lots of small businesses, paper checks are incredibly, heavily present," Eliscu said. "Half of all [business-to-business] transactions are still paper-driven. That means the check stock has to be in the hands of the owner or in the printer at the office. Viewpost allows businesses to do what they're doing today, write checks, but they can do it from their phones."

The service will give Bank of America something for its 1,200 small-business specialists to offer customers who might be tempted to pull their deposits out of the bank when interest rates inevitably rise.

"As we go through the sales process with new customers, we'll talk to them about, 'How do you manage your cash flow?' 'What are the tools and capabilities you have?'" and then show how Viewpost could be used to manage invoicing, payments and cash flow in one place, Barr said.

The bank will integrate Viewpost into its online-banking site for small businesses. "That's a great opportunity for customers to have one place to go," he said.

"It plays to this need we consistently hear from our customers: cash flow is key to my business, and the No. 1 obstacle I face in terms of cash flow is getting paid on time," Barr said. In a recent survey, he said, small-business owners showed an increased willingness to adopt technology.

Such an integration could help small-business customers reconcile their checkbooks. "If they have lots of checks outstanding, they sometimes are guessing what their available balances are because not all checks have posted," Eliscu said. "In the fully integrated world that's coming, you can write checks and send payments from Viewpost, and see the image of the invoice."

Viewpost can also export invoice information into QuickBooks, Microsoft Dynamics and other applications that small businesses use.

These partnerships are examples of how banks can take advantage of the fintech revolution and make it their own.

Penny Crosman is American Banker's editor at large. She welcomes feedback on her column at penny.crosman@sourcemedia.com.