08

Jun

2015

PreCog SMB Lending

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Precognition (from the Latin præ-, “before” and cognitio, “acquiring knowledge”), also called future sight, and second sight, is an alleged psychic ability to see events in the future. For those who love Philip K. Dick, there is Minority Report.

We are hurtling towards an increased immediacy and intimacy of lending both in terms of how fast the lending decision is triggered and how well the lender knows the borrower in the SMB space.

Banks have traditionally done a poor job financing SMB growth. The 2008/09 financial crisis added insult to injury, leading to a major bank lending retrenchment across various geographies. Alternative lending platforms seized the opportunity, armed with better technology, sharper data analytics tools and an appetite to provide faster credit to a wider array of SMBs. The results have been astonishing and banks, as they should, have started to worry.  Bank worries have in turn led to partnerships with alternative lending platforms and/or direct investments – to name a few BBVA, Santander, JP Morgan, Goldman Sachs, Barclays, Westpac, and many more to come I am sure.

Below is a summary of the various lending paradigms as they have evolved over time. We are in what I would call the “Forward Looking Lending” paradigm, led by alternative lending platforms. The below table endeavors to show that increasing immediacy intimacy of lending.

Screen Shot 2015-06-07 at 1.29.31 PM

 

What if this was not the evolutionary end? What if the limits of technology and data analytics were stretched further? What if instead of SMB borrowers seeking credit, lenders were to provide credit before the borrowers were to realize they needed it. PreCog lending. Sounds like science fiction?

Matt Dooley who I recently met in Hong Kong, gave me this example: “Imagine a small cadre of young girls who share their likes and dislikes on a social network. Further imagine said social network has become very good at spotting trend through advanced bulk data analytics. Now, one day, this small cadre of young girls share and like a particular lipstick from obscure brand. The social network spots this nascent trend and its analysis leads it to conclude with extreme certainty that the manufacturer of the obscure brand is about to experience explosive growth. Many hundreds of thousands of young girls will soon demand that particular lipstick. The social network contacts the lipstick manufacturer, tells them they are about to experience hyper growth and offers a pre-approved loan to finance said hyper growth.”

Science fiction? Really?

What would it take to fulfill this vision? One needs a social network to aggregate consumer data, a marketplace and an e-commerce platform for purchasing of goods and services and further data aggregation, and finally a logistics platform to fulfill the orders placed on the marketplace and the e-commerce platform. Kind of a cross between Amazon, Facebook and eBay come to think of it. One company fits that bill, Alibaba. And Alibaba has started providing loans on its platform to SMBs…. When you pay closer attention Amazon has started an SMB lending program of its own, Ebay via PayPal, prior to the split, also had an SMB lending program. Facebook would be a natural partner to an alternative lending platform or could partner with eBay or Amazon very naturally. I will through in Google for good measure which could enter the fray in similar fashion.

The lipstick example above is an extreme case. Yet, think of the value proposition a company that can deliver deep data intelligence, a venue to sell products or services and the logistics infrastructure to effect payments and shipping can do to the lending ecosystem. Banks built their businesses by financing trade and small businesses. Banks competitive advantage was their branch network, presence across geographies, correspondent banking partnership and deposit gathering capabilities. Banks delivered capital to SMBs. Alibaba, to stick with the above example, matches and then obliterates the branch network advantage, derives superior data analysis via intimacy with consumers and businesses alike. Alibaba can provide advisory services to SMBs, much more than just capital.  Alibaba, and Facebook and Amazon and Google and eBay. If and when Banks loose their grip on SMB lending, they will be in even worse shape.

The future is being assembled right now, and if I were a bank, I would fear Alibaba or whoever else can replicate the  “precog” strategy much more than an Alt Lending platform.  Social Network consumer data + b2b/b2c Marketplace and its derived data +Logistics platform + e-commerce platform + bulk data analytics + machine learning = PreCog SMB lending.

One last question. Which strategy will be easier for the likes of Alibaba, Amazon, Google, Facebook, eBay, PayPal?  To acquire a bank license or replicate a bank license via strategies?  The answer lies with the friction a regulator in a specific jurisdiction will create.  Either way, banks will be faced with formidable competitors.

 

 

 

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Pascal Bouvier
pgb2008@gmail.com

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

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