Fintech lenders find comfort in the steady cash flow of humble corner shops

One of the few areas of the economy that seems to be doing well is small business lending. Yet the interplay between these two sectors is now of special interest — and excitement — in the tech industry. What is happening is that some of the smartest young banks and financial companies are finally launching “alternative” loan products, which operate in spite of conventional banking rules rather than because of them. One such company is Santander, which recently unveiled the installment loan Fluid Scorecard. (This “new lending product” is not a line of credit, but a service that adds metrics to a borrower’s existing credit score, which is currently computed on a three- or seven-day rolling basis.)

It has even raised a billion-dollar fund to finance such things. This move marks a dramatic shift in the industry. Once upon a time, when I first started writing about financial technology, the idea that would-be applicants might miss their home equity loan deadline was considered absurd. But now the market has matured to such a degree that a truly complex credit risk has emerged. And that’s not all: There are companies that will take a portion of a loan to write off payments to creditors in the interim, in order to free up cash flow for other uses. The money is collateralized by a mobile phone, and can be called up at any time. All of this is no longer news.

Banks routinely offer on-demand and instant processing. And yet, try selling most people on the idea that they can easily pay off their payday loan when they have to. These new-age financial products don’t seem to be reshaping how people get credit. They might make life easier, but do people even realize that banks are struggling to meet the challenges of plastic-based financing? A key insight about financial products in general is that they tend to start with existing customers rather than attracting new ones.

Customers of big banks tend to prefer those institutions to those of the robber barons of the past. They understand that they can simply move to the Chase (or Citibank or Bank of America) branch if they have problems with their account or want more help — and I suspect this isn’t just the case for low-income customers who struggle to find a bank but also with retail customers who are familiar with the do-it-yourself approach. Yet that very ease of doing business doesn’t lead to a constant flow of credit or profits. Payday lenders, for example, have come under increasing scrutiny in recent years, since they tend to rack up significant debt defaults. And sure enough, that seems to be the case. Since the payday lenders’ recent regulations — restrictions that amount to no more than a 10-cent interest rate limit, and a strict 90-day grace period between payments — many are facing financial problems.

This could be why we see innovation in the industry. The market seems to have moved from imagining entirely new marketplaces, where consumers would readily join in — to perhaps looking in the opposite direction. In case you’re worried about the government stepping in to regulate these markets, it might be that small-bore finances represent the type of transaction in which even small governments would be appropriate. Or you might want to consider totalizing the economics of financial markets — which tends to be a necessary ingredient for the workings of the online daily deal economy.

Either way, the tech companies seem to think that they have at least a small role to play in reviving the U.S. economy — and doing so via providing the ultra-low rates to which consumers have become accustomed. In many ways, such lending products are just a second or third generation off the idea of payday lending, which was an all-you-can-eat bad debt buffet that left plenty of room for growing. But they are gaining widespread acceptance.

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