Is Money Still Green?

By: Richard C. Bollinger, CPA :: May 23, 2017

What does the future look like for lenders in the middle market? 

Millennials are now the largest population segment ever in U.S. history. They are commonly referred to as the first digital generation, as they have grown up with technology at their fingertips. This generation has been greatly affected by the great recession and economic disruption, shaping their views on banking and finance. More importantly, this is a generation that is driving change and will leave an imprint on communities, businesses, and organizations as they come of age. 

For this generation, the smartphone is the new wallet and fintech the new buzzword.

The term fintech is the new buzzword for the merger of finance and technology. For many, fintech is best known as how to use your smartphone to check your bank balance, pay with ApplePay, PayPal or transfer funds through Venmo or Square Cash.   

Millennials put their movie tickets, boarding passes, reward cards, gift cards on their phones, and the rise in peer to peer money transfer apps is staggering.  Paypal’s Venmo service, popular among young adults, processed $5.6 billion in just the 4th quarter of 2016, a sliver of the $99 billion that PayPal processed in that time. 

The flight to technology is changing lending.

After the financial crisis, we saw a rise in the launching of online platforms for loans and lines of credit. Post-crisis regulations and the general economic environment spurred growth of these platforms versus traditional banking business lines. Many of these online lenders looked to different segments that were impacted by this post-crisis regulatory environment. Areas like consumer unsecured credit, small business lending, student loan refinance, and HENRY’s…high earning not rich yet millennials …became ripe for the online lending market.

With the rise of online lenders came with it investment dollars chasing companies poised to fill those gaps and create a generous return. According to data from Pitchbook, since the start of 2011, online lending has attracted $12.6 billion in capital across 463 completed deals. Investment in the space has increased exponentially this decade, reaching a zenith in 2015 when nearly $5.0 billion in capital was invested across 174 completed deals.

Is this the beginning of the evolving of the lending market for all businesses? Or are online lenders just filling a gap where banks won’t play?

By somewhere between 2020 and 2022, Millennials will be over 40% of the workforce, and some will have elevated into c-level positions.  This generation, many currently running small businesses, are frequently exposed to online lending platforms with their point of reference an easy to process, quick to answer loan product. 

This generation of young professionals is open to a more public, connected universe of options in worlds many hadn’t been exposed to previously, like equity investing and debt lending.  This generation has shown no signs of avoiding debt or equity infusions to support the growth of their business.  Many have been active on fundraising sites like GoFundMe or Kickstarter or may have tried their hand in an online lending peer-to-peer model.

However, when it comes to finance and banking, recent surveys show 71% would rather go to the dentist than listen to what banks are saying!  They are also 3 times more likely to open up a new account on their smartphone versus in person.  That being said, if they are not pleased with the service, Millennials are 5 times more likely to close all accounts with their primary bank and switch. They also feel disconnected from the financial services industry as a whole. A recent Facebook study showed only 8% of millennials said that they trust financial institutions for guidance.

However, as banks begin to embrace this world of big data and analytics, there are opportunities for them to embrace this world of meeting millennials where they are. With continued improvement in machine learning and predictive analytics, combined with more robust social media applications, banks can continue to find ways to learn more and approach their customers.  

What areas will start to change for lenders?

We live in a connected world, and Millennials are a generation used to having answers just a mouse click away.  But for businesses, sometimes finding the right bank lender is like its own prolonged interview process.  It gets more delayed if that business is being steered towards the non-bank lending market.  Are we that far off from one or multiple “debt search engines” that can take the search phase to a faster process by filling out an online application or uploading material to immediately be matched with lending options?  Groups like Lendio, Fundera and LoanConnect are helping consumers and small businesses navigate the online lending options, so we should expect to see this front-end connection in the near future for middle market companies.

Can we expect to see progress in how banks and lenders collect data for underwriting new loans and lines of credit?  Are we far off from being able to download directly from Quickbooks or other accounting software, pull in digital UCC and lien searches, background checks, and equity funding information from a Pitchbook or Capital IQ and pull out relevant data to populate a pre-screened company profile that fits the major components that all financial lenders can underwrite too? 

The real test for how this generation shapes our banking industry will be learning how to marry the technology and front-end aspects of a loan process with the proper underwriting skills needed for a healthy portfolio.  We have seen a recent slide back with some in the online lending space as problems in the portfolio have created charge-offs and poor financial performance.  However, as banks and lenders continue to use big data and predictive analytics on their wealth of loan deals across their history, trends and lending parameters can be formulated and ultimately programmed for machine learning.   Are we far off from a centralized online aggregator that can utilize a shared rating system based on financial performance?  We already see internal risk ratings for lenders as well as industry accepted scoring systems like S&P and Moody’s and Probability of Default metrics. As lenders get better at turning years of experience of how to understand the story of a potential lender into code and credit analytics, then we will start to see a dramatic shift in how lenders and borrowers engage in a lending process. 

Current generations of business owners are used to options, but as Millennials rise through the ranks, they have been accustomed to options AND speed. 

At CapX Partners, we are harvesting our data to continue to stay ahead of this quick response trend.  This means analyzing all of the investments that we have closed, the ones that went didn’t work out, the ones that required tighter monitoring, and the ones that were realized as planned. Currently, this is what we see as CapX’s advantage. By focusing on a specific segment of the middle market debt space for over 18 years and helping over 200 companies since our founding, we have a wealth of knowledge at our fingertips.  As we continue to embrace this change and evaluate this information, we become more relevant and consistent for this generation of business owners and the ones to come. 

Millennials are driving change and banks and lenders are working to adapt and become more responsive.  Lenders like CapX will continue to keep pace by learning how to streamline credit decisions and analyze our own data to connect with all generations.

Richard C. Bollinger, CPA, Managing Director

Richard joined CapX Partners in May 2002, bringing a well-rounded depth of experience to financial accounting, taxation and portfolio management. In 2005, Richard opened up the firm’s California office, and is now responsible for business development and underwriting for the West and Southwest portions of the United States. Prior to CapX, Richard worked for KPMG, where he performed financial audit and attestation work for privately held and publicly traded companies. Richard graduated from...