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Andrea Schmalzer is an analytical consultant in the Commercial Data Sciences team here at Experian, and she just completed a study of the mining industry titled "Managing volatility: the unique credit risks of the mining industry", so we did a quick Q&A with Andrea about her research. Gary: Hi Andrea, why did Experian study the mining industry? Have there been any notable changes to this industry in recent years? Andrea: Hi Gary. We decided to study the mining industry in order to evaluate the impact the mining industry has on small businesses that are supporting that industry. Knowing that there will be some volatility as we see shifts in which fossil fuels are predominantly being used. As far as changes go, we have seen a decrease in coal production. Some of this is due to the fact that we had the big boom in natural gas which caused the natural gas prices to decrease substantially. And also just due to the fact that the coal supplies are decreasing overall. Gary: Can you tell us what states driving the bulk of the mining in the United States. Andrea Schmalzer: So Texas is the number one oil and gas producers in the country. As far as natural gas we also had that being mainly produced in Pennsylvania and Oklahoma. For oil, we do see that being produced in North Dakota and California, and as far as coal mining goes that comes from Wyoming, Kentucky and West Virginia. Gary: Andrea what impact has the decrease in natural gas and oil production had on the local small business economy? Andrea: So, North Dakota was one of the most impacted states when the prices of oil dropped because they decided to stop drilling because it wasn't cost effective. So we did see employment drop quite a bit in the oil and gas industry. But overall as a state North Dakota is still under a 3 percent unemployment rate. Some of those folks are now working in retail or grocery stores, gas stations in hopes that new drilling will come up again. For businesses though we do see delinquencies shrinking in the retail segment also in the manufacturing segment. However we do see charge off's increasing for both retail and manufacturing which is one area we need to keep an eye on. Gary: With the falling supply of coal in West Virginia what trends are you seeing in business credit and delinquency? Andrea: Like you said we've seen a large decrease in coal production in West Virginia, most notably in the southern counties of West Virginia. And with that we've seen an increase in unemployment and in some cases an increase in delinquencies. For example the retail and service industries have seen an uptick in delinquencies in southern West Virginia compared to the rest of the state. But we aren't seeing write off's come through yet. So an area to keep an eye on. Also overall in West Virginia we do see higher delinquency rates in the agricultural industry for the coal counties versus non-coal counties. But again, like retail and service we aren't seeing the write the off's come through yet. So definitely an area we need to keep an eye on. Download Whitepaper

The Consumer Financial Protection Bureau (CFPB) is engaged in increasing its understanding of the opportunities and potential challenges associated with consumer permissioned account data. The agency launched a request for information on the topic in November 2016 and is currently analyzing information it received prior to the February 2017 comment deadline. In remarksat a field hearing in conjunction with the launch of the RFI, CFPB Director Cordray stated, that "access to digital financial records is critical. As with your student records or medical records, your financial records tell an important story about you. With health care, for example, if you can see your records, it is easier to participate.” Demand for financial account data goes beyond consumer loans and its use in the small business credit-granting process has been increasing. Experian recently entered a partnership with Finicity to develop new tools that will make it easier for small businesses to apply for a loan and to accelerate loan underwriting. These tools are used for authentication, verification of income and assets, and cash flow analysis. These tools improve accuracy and reduce fraud risk for lenders, thereby broadening access to loans. Experian's new Digital Verification Solutions leverage Finicity's data aggregation and insight platform. Experian is the first credit bureau to implement this technology, which gives small businesses the opportunity to secure loans with less paperwork and hassle by connecting with financial institutions digitally. While this information is currently limited in use for credit risk analyses for small business lending, Experian believes that user-permissioned account aggregation platforms will increasingly provide an opportunity to collect and analyze cash flow and recurring payment information relevant to lenders in making credit decisions. For example, user-permissioned data from a businesses’ bank account could demonstrate the entity’s payment history for utilities and telecommunications services, as well as for monthly rent. With respect to the collection and use of data obtained through account data aggregation platforms, it is important that a borrower grant permission pursuant to clear statements about how the consumer's information will be accessed and how the data will be used. Such statements should include whether the data will be shared with third-parties, and for what purposes. It is vital for market participants — both financial institutions and account aggregators — to continue to work together to develop cooperative agreements that allow data to be accessed, analyzed and shared in an efficient and secure environment. Recently, several account aggregators have formed direct agreements with financial institutions and there is ongoing work to develop best practices and industry standards for secure consumer and business access to financial data. In the past, the CFPB has promoted this ecosystem. As with other commercial credit data, financial account data can be used to make decisions throughout the credit lifecycle. This includes supporting pre-qualification when a business is prospecting for new customers; conducting credit risk analysis and verifications; managing portfolio risk; and if necessary, collecting on unpaid or overdue debts.

This week for Business Chat | Live we interviewed Peter Bolin about business owner wealth, and how lenders are finding new ways to evaluate entrepreneurs in the underwriting process. Gary: Today we're going to have a discussion on business owner wealth and evaluating business owner wealth in risk models. Joining me today is Mr. Peter Bolin. He's the Director of Analytics and Consulting for Experian. Good morning Peter. Peter: Good morning Gary. Good morning everyone. Gary: Let's just kick off this discussion. Business owner wealth and small business owners and evaluating risk. What's it all about? Peter: Yeah, thanks Gary, thanks everyone. As I travel around talking to a hundred clients a year, one theme that always comes back is, "Hey Pete, can you and Experian help us get to yes?" We know that there is a pool of small businesses, a pool of small business owners out there that are small, that are emerging, that are cutting edge, maybe not solid yet, but they don't have a credit file, what we typically call maybe credit invisibles or maybe thin files, but we know that they have a good idea, we know that they've good product and services, but we can't approve them. Is there anything you can do to help us get to yes? At Experian we got to thinking about that. We have a tremendous amount of data assets as everyone know. We looked around and we said, "Hey, there is this new product that we have called the Wealth Opportunity Score," and that estimates, based on our proprietary database, the wealth of an individual. We got to thinking, does wealth of a business owner affect the opportunity to be approved? That's what we're here to talk about today, Gary. Can we use the Wealth Opportunity Score on a business owner based on a sample of our data, we have some great results, and we definitely feel that we can help lenders, wholesalers, target marketers, get to yes. Gary: Okay. So you mentioned getting to yes. What does that mean in terms of say, a new business or a business that has say, a very thin credit file? How does that work? Peter: The first thing that we do when we're evaluating any new data source, and while wealth insights have been at Experian for a year or two, it's new, we're introducing it for the first time to the commercial space for the business owner, the first thing we do is say, "Okay, can we get a predictive lift by using this data?" The answer is yes. In particular, can we use this in the thin file, in the very, very small, emerging businesses that maybe we could refer to as the credit invisibles. It's kind of an overused term. Invisible to who? So, we're using this in this example as credit invisible are a very thin file or maybe have no file on the commercial credit report. We took a sample of business owners in that population and we added this Wealth Opportunity Score as an attribute within our demographic only segment, and we said, "Yes, indeed, this does help the predictive power of that segment." Going from a KS of a 16 to a 23. A KS for those of you who might not know, that's the Kolmogorov-Smirnov statistic, that's the industry standard for measuring the predictiveness of the model, the higher the KS the better the separation between the goods and the bad. We're seeing that yes, by just including this data, on the credit invisible/thin file, that segment was able to improve the predictive power by 43%. Gary: Wow, that's incredible. So, we discussed the better prediction of risk using the owner wealth. What does rank ordering have to do with that, and why is that such a big deal? Peter: As quant jocks sometimes we get overly, overemphasize the KS, the rock, the Genie, area under curve and those are all important statistics, but we can't forget about another critical part, which is the stability of the model. That's where we look at how well it rank orders. We'd like to see a nice, smooth monotonic progression in the rank ordering of the bads throughout the decile. We would like to see a large number of bads pushed down to the riskiest scoring, and fewer number of bads pushed up to the least risky. As you can see, when we added the Wealth Opportunity Score to our demographic only file, we got a nice, more smooth monotonic progression, which says not only do we get lift like we talked about in the first slide, but we're also improving the stability of the model, which is very, very important. As you can see, it's still a little bit choppy. Some of you might say, the skeptics out there might say, "Gee, Pete, this is all pretty choppy." However, keep in mind this is a demographic thin file, not much to go on other than some key demographic items, but by adding the Wealth Opportunity Score we're able to increase the predictiveness and the stability of the model. Gary: Wow. Okay, so there's been a lot of talk about women-owned businesses, minority-owned businesses lately. How does wealth play in the role in accessing credit for minorities, and in particular women-owned businesses? Peter: Absolutely. Gary, that's a huge topic right now, access to credit. Do minority-owned businesses and especially women-owned businesses have access to credit? We're also looking at data to help evaluate that. The next thing we did was, we were curious. Okay, is there a difference between a male-owned business and a female-owned business when it comes to wealth? Really, if you look at the bottom two lines on the curve, you see that there's really not. They're pretty similar. They are fairly similar. There is some blips on the lower side, so if you're looking at the left side of the graph, you do see where that pink line is the female owner, they do tend to have slightly lower wealth, and that's measured on the first Y axis. What we're saying is that there's really no difference. If you're looking at wealth, there isn't much difference between a woman-owned business and a male-owned business, so that should not be a prohibitor in access to credit. The other thing that we looked at on the other, secondary X axis, is the whole concept around annual spend. This is annual spend on the business owner personally, not the business, so I just want to make that clear. We looked at that, and we saw similar trends, that there really wasn't much difference in spending except in the very, very high quadrant up there, there was a little bit of difference in the extremely wealthy. Actually, it says that male owners, male business owners, had much more annual spend. So, not only were we introducing the Wealth Opportunity Score, which is a new concept in commercial lending, we're also looking at the total plastic spend on the business owner personally, which we found is a very powerful indicator, especially when you're trying to target market. Gary: Excellent. Okay, changing gears a little now, to target marketing and how does wealth help with those that are maybe in the market for credit? Peter:  Well, it's very interesting Gary, because what we find is that there's an inverse relationship between wealth and in the market, so very, very wealthy owners are not as in the market based on our in the market score. We have a business credit seeker model, which predicts the likelihood that someone's going to open up a new trade, so, that they're in the market. They're really serious about it. We threw these attributes and this scores into that model, and what we found is that intuitively I think that it makes a lot of sense as well. What we see is that lower wealthy business owners are more in the market, right? They don't have any personal wealth. They need capital. They need access to capital. They're anxious to get capital. There's a higher percentage of the lower wealth spectrum that are looking for credit. However, however, that's not to say that the high end, so if you look at the very high end, three million or more in wealth, there's also a percentage, 9.5% of the population that are also looking for credit. They could be a small business, they could have two employees or less, they could be around for two years or less, but they have high net worth. They might be invisible on the commercial side and this Wealth Opportunity Score will definitely help them, help lenders and wholesalers get to yes. Gary: Are there other particular industries that you recommend targeting with the new business credit seeker model? Peter: Sure, that was the other kind of thing that was surprising to me, I'll be very frank. This surprised me, because when we looked at the industries and then we plotted the risk scores, and then we plotted the bad rates, and then we looked at the wealth of the individual, or sorry, not the wealth at this particular point. What we're looking at here is the actual in the market. What we found is that the industries that have the highest in the market percentage, which is measured on the blue bar, and then we look at their average IPV2 score, that's Experian's commercial risk score predict a likelihood of a trade going 91-plus, we see a convergence that the agricultural, wholesale trade and mining industry, which surprised the heck out of me, were the three industries that have the highest percentage and likelihood to be in the market, and also had the highest IP score, which means they have the lowest risk. The mining industry in particular, Gary, is shocking, because over the last eight years, without me getting too politically sensitive, that industry has taken a battering in the last nine years. Big cuts, big cutbacks, in traditional coal mining, and what we're seeing now, with some of the new administration's outlook on mining, the regulations are coming off and we're predicting that this could be a very big growth opportunity for our clients in terms of marketing, in terms of wholesale credit, traditional lines of credit, and traditional term-type credit. The mining industry in the market and a very high IPV2 score, and later on we'll see also some interesting wealth information about that as well. Gary: Excellent. You talked about credit scores. What about bad debt rates and industry targeting? Can you talk a little bit about that? Peter: Yep, very similar results. We also wanted to look and see what the bad rates were for each of these industries to give the viewers an opportunity to see this trend. This is also the exact same thing as you saw with the score, relatively low risk. Agricultural, wholesale trade, mining again, when you look at their bad rates as measured on that secondary axis, but high in the market. Very, very surprising to me, once again, I did not expect to see especially the mining, given the fact that they've been hammered the last nine months, so again, if you're looking about low-risk industries to target, those are the three that I would recommend. Gary: Does owner wealth matter in these industries in particular? Peter: It does, it does, especially again in the mining industry. You see some interesting wealth statistics. If you look at the distribution of the Wealth Opportunity Score, which once again, predicts the wealth of the business owner, or the individual but in this case we scored it with business owners, you see some blips. Those yellow bars, some blips, and as you can see, there's also a tremendous opportunity really up there in that big, look at up there, there's a significant percentage in all three of these industries, but particular mining industry that have extremely high net worth. We already know from previous slides that they have low risk, low bad rates, so again, the mining industry, high wealth, high scores, low bad rates, again, another indication that using this data can help you get to yes. Gary: What about micropreneurs, you know, these businesses that are just emerging, just getting started, they're credit invisible, right? Does the business owner wealth factor come into lending and risk models? Peter: Certainly, and the whole concept of a micropreneur, that's kind of a new term, I'm not even sure it is a word, but maybe we invented it, the micropreneur, a great concept, very, very small businesses. It's not uncommon, Gary, that I get the following statement made to me when I'm talking to clients: "Pete, we don't approve anyone that's been in business for two years or less. We don't approve anyone that has two employees or less. We don't approve anyone who's a sole proprietor. We want to avoid those type of businesses," and I would urge all of the listeners and all of the viewers to think a second time about that, because even if you look at the far right-hand side bar, there are 28% of the population with three million or more in estimated wealth, 28% of that population have been in business or have one or two employees or less. That wealth could be used in your personal guarantee situation, that could be used as collateral. The other nice thing about the Wealth Opportunity Score before I forget is actually evaluating the net worth of an individual. It gives you the opportunity to verify that. It's very common in these situations that if a small business, one or two employees or less, goes in for an application, applies and they have to have a personal guarantee, and they say, "I'm worth $3 million," well, how do you know? Well, with this system you can come to Experian and at least get an estimate that that wealth is right, that you've verified that wealth and that you can set your credit limits, you can set your approval accordingly. So again, what does it mean for the micropreneur? It means that if they have wealth, it's another data point that can help you. Gary: It's helping them get their businesses started. It's helping to drive the economy, which is, at the same time this is good for everybody. It's a win-win situation of, it sounds like to me anyway. Peter:  Absolutely. You know Gary, the whole concept of what we're talking about today comes from my personal passion, and I know Experian Business Information Services as an entity's passion, to be an advocate for the small business owners. What we talk about frequently. Through this passion, we're looking at all of our data assets. Can we use our data assets for good? And the good is, as small businesses goes, so goes the United States, and I'm really passionate, and I know Experian Business Information Services is passionate about turning over every leaf, every piece to data, that will fuel small business growth and fuel our economy. Gary: That's awesome. Okay, well this has been excellent Peter. I think if folks are interested in this, we just invite them to drop a comment on the video here if you find this on YouTube, or come to our website, experian.com/b2b. I'm sure we can connect you to Pete and his experts in business information if you want to talk about business owner wealth models. Pete I want to thank you so much for taking time out this morning to come on and talk to us about this topic. I really enjoyed our chat, and we'd love to have you back again in the future. Peter: Thank you Gary. I had a lot of fun. My first live TV spot. Gary: All right, thank you Pete. Have a good day, and- Peter: Thank you. Gary: And have a good day everybody. Thank you so much for coming to our live video. As I said, we're just wading into this. We'd love to have more of these live shows. If you've got ideas for live shows, if there's things about business information, things that would help you be more successful in business or evaluating risk, just send us a note on our YouTube channel. We'd be happy to consider that, and maybe put a show together. Maybe even invite you on as a guest. That's it for today, so thank you everyone and have a good day.    

One of the world's largest financial institutions, Citi is determined to keep pace with rapid changes in international commerce. As detailed in the April 2017 issue of PYMNTS.com's B2B API Tracker Citi believes APIs – Application Programing Interfaces – are the key to getting international businesses the financial information they need to prosper. "We realized [our] clients were getting into newer business models which require faster access to payments [and] faster access to information," Mayank Mishra, managing director and global head of channel services for Citi treasury and trade solutions, told B2B API Tracker. "We had to go with a standard that was well-accepted by clients so they wouldn’t have to go through massive infrastructure changes." He noted the company's heavy investments in APIs will give its customers "the flexibility they're looking for to access the relevant information they want." Like Citi, Experian is eager to serve clients in a nimble, open fashion. To address this need Experian has created an API Developer Hub. Found at developer.experian.com, the Experian API Developer Hub is poised to expose the company's deep and detailed data on businesses and consumers, in addition to Experian’s automotive, health, and decisioning services in both the US and across the globe to the developer community. The API Bonanza Although they have been around for years, APIs have recently garnered lots of attention from companies of all types and sizes. "APIs are a technology exposed over the web that allow applications (software programs) to talk to one another," explained Mike Myers, Experian's Senior Director of Product Marketing. "APIs provide software developers with instructions on how to easily access and integrate data that can help fast track new ideas, partnerships, and innovation." Myers leads a team that creates business information APIs for the API Developer Hub, giving developers easy access to Experian's business information to use as they see fit. Laid out simply and intuitively, the Developer Hub serves as an easy-to-use "window" through which users can see: The depth and breadth of information Experian can provide to them How to acquire this information in a form most useful to their company How this information can be easily requested and consumed Serving Both Established Core Customers and Aggressive Start-Ups Myers explained that there are two principal markets for the new API Developer Hub: Mike Myers Experian AgileWorks "The first is our core customers, mainly financial institutions, insurance companies, trade credit, credit managers – basically the user who needs to integrate Experian data to determine their customers’ status, needs to reduce friction and minimize risk when making credit decisions as well as satisfy compliance regulations. This use case has been our bread and butter for decades," Myers said. "They need to manage risk. They must ensure their operations are in compliance. And, perhaps most importantly, when issuing credit, the likelihood that they’re going to get paid. That’s really the bottom line and is a key issue our API developer portal is designed to address." The second use case is designed for the developer community. “Developers are working for companies of all types and sizes that have yet to experience the power Experian’s data assets can deliver. They may share similar needs to our core users, but they most likely also have completely different market problems which Experian data can help solve. Maybe it’s a subset of our data applied to a new use case or maybe it’s combining our data with other data in new and innovative ways.” Experian designed the API Developer Hub to be as user-friendly as possible. New accounts can be setup in minutes. "It's taken a historically offline process and converted it to real-time” Myers said. Developers can explore a host of options, including access to APIs for Business Search, Business Credit, Commercial Public Records and Business Compliance Insight. We don't know what new apps or offerings will appear because of this new venture, but with the amount of energy, imagination and innovation driving today's tech world, we suspect that through APIs, developers will enhance the power of companies -- and consumers -- in ways we can't yet even imagine. We are proud -- and thrilled -- to be contributing to this ongoing revolution. Experian Developer Hub

On May 9th we hosted an episode of Business Chat | Live on our YouTube channel and enjoyed an enlightening discussion with Gavin Harding, Senior Business Consultant with Experian Business Information Services. In our chat, Gavin shared highlights from his marketplace lending panel "Bridging The Gap: Reconnecting Investors with Marketplace Lenders in a Volatile World."   Gary: We'll get started here. Welcome everybody. My name is Gary Stockton and I'm with Experian Business Information Services and we're gonna do a Business Chat Live today focusing on marketplace lending. I'm happy to be joined by Gavin Harding, and he's a senior business consultant with our business information services team on the global consulting side of the business. And Gavin is out at the Experian Vision Conference, so good morning, Gavin, or good afternoon, I should say. Gavin: Well, it's a little of both. It's morning for you and afternoon form me. Hi, Gary. Gary: So you had hosted a panel discussion yesterday called Bridging the Gap: Reconnecting Marketplace Investors with Marketplace Lenders in a Volatile World. Who was on the panel with you? Gavin: Well we had a really good industry cross section. We had Nat Hoopes who is the executive director of the Marketplace Lending Association. We had Frank Rotman who is the founding partner of QED Investors. And we had Peter Renton, who is the co-founder of LendIt, probably the biggest online marketplace lending conference worldwide. Gary: Peter Renton, he has worked on the LendIt Conference, but also Lend Academy, right? That's a resource for marketplace lending. I listen to his podcast. Gavin: That's right. Gary: We've spoken to Pete a number of times, so he's quite the expert in that field. There's been, in terms of marketplace lending and the news, there has been some negative news around the industry in recent past. Is that something that came up? Gavin: Indeed it did. Over the last 12 to 18 months, there has been a spate of negative publicity. The industry in general, the media has in a way turned on the industry on the basis of a couple of events related to specific companies in the space. The good news is that while that negative publicity had a negative impact last year, it seems that the industry has rebounded. It seems that it was a watershed moment where the industry recommitted to transparency, where they enhanced their whole approach to risk, improved their approach to operations. So if we characterize last year as perhaps a low point, the general theme of the panel was that the industry's really poised for growth, has grown up a lot over the last year. And you know, we talked a lot about credibility and trust and so on, and Nat, from the Marketplace Lending Association, you know, obviously that group started about a year ago and it has now grown to 19 members, so pretty rapid growth. When we think about the 19 members, we estimated that that covers about 90-95% of the total volume of loans and credit facilities in the space. So Nat and his team worked hard on transparency, disclosure, harmonizing standards and so forth, so it was really good to have him on the panel. Gary: And Experian, are we a member of the MLA? Gavin: We are a proud associate member, yes we are. Gary: Excellent. So let's talk a little bit about bank partnerships and what are the kinds of things you were talking about related to bank partnerships? I'm sure that was a big part of the discussion. Gavin: It was. About 24, 36 months ago is when this topic became pretty hot. Lots of conversation between banks and players in the industry. Those conversations in some very high profile ways result in partnerships. We think about Chase, we think about OnDeck. As the year has progressed, what's started to happen is, the mood within the industry has changed. Banks now expect partners in this space to speak their language in terms of risk, to be fully compliant, to understand all the rules and regulations. So the short statement is that in the last year, within the online lending space, compliance has become a competitive advantage. Compliance and operational discipline has become a selling point. So again, that's part of the ongoing theme of the industry and the sector growing up and maturing, so really positive. The one comment that I believe Frank had was as we think about partnerships with the banks, be prepared to hear no a lot before you get to yes. Be prepared to translate between the two very distinct audiences. So in terms of working with banks, use their language, understand the regulations, understand what pressures and demands are on them, and the outcome of that will be a much higher success rate and much more positive, productive conversations. Gary: Excellent. How about the sector performance overall? Is it a growing sector? The banks, I would imagine they've expressed a lot of interest in that. Are we seeing growth in that sector? Gavin: Interesting question. We talked about some of the negative publicity last year. Some of that related to some practices in parts of the industry over the last two to three years, so what's happening now is, because of a refocus and redirection towards credit risk management putting out more and better loans for appropriate returns and so forth, we're seeing the whole industry performance has really been elevated. A lot of the perhaps substandard loans or facilities have now run off, run off meaning they've matured and have been paid off. And the new business that's been put on is more sustainable. It's a more disciplined approach. So yes, overall the sector has improved significantly in terms of performance over the last year. Gary: Excellent. And so, obviously you're meeting with plenty of Experian clients there at the conference. What is this, your third or fourth Vision? Gavin: This is my third and we are here with, I think it's a little over 500 of Experian's clients globally. Many of clients from Europe, Asia, and so on so it's a really great experience. Gary: Yeah, and I saw you had Steve Wozniak, co-founder of Apple Computer as one of your keynote speakers. Gavin: That's right, that's right. On Monday morning for our breakfast presentation, we had the Woz and the big news on that, Gary, is, I know this will probably startle any listeners, that apparently Steve Jobs was not always a very nice person. So that's a newsflash there. Gary: Brilliant guy, though. You can tell I'm a customer. Gavin: Fantastic. The innovation, the dynamism was just radiating from him. He talked about some of his rules of life and he said he was never interested in money, he was interested in thinking and creating things and making things work. Somebody said, "Steve, what motivated you when you were an employee at Hewlett Packard and how does that maybe translate into what we should be doing with employees?" And Steve Wozniak said the major attraction for him at Hewlett Packard was that they let him go into their stores, their inventory, and take whatever electronic parts and components he wanted to create his own products at night. So he would talk about going home, having dinner, and going back, going into the stores, grabbing the components, and then making the products. And some of the original pre-Apple I computers were made from Hewlett Packard parts in Steve Wozniak's - he said didn't actually have a garage. It was more of a basement, but in his house. So really an interesting presentation. A really dynamic guy. We were lucky to have him. Gary: And you also had, an economic presentation by Diane Swonk I think I saw. Gavin: Diane Swonk this morning, really interesting presentation. A little bit of a different perspective than what we often see in terms of the high-level economic factors like just raw unemployment versus full employment and so on. She dug a little bit deeper but beyond that she had a couple of key messages. One of the messages is that we are almost at, depending on definition, full employment. Wages have increased over the historical averages over the last couple of years. So while the broad improvement in the economy was visible, it's only now hitting our pocketbooks. It's only now coming through in consumer spending. So that was pretty positive. She has worked a lot with both the current and past administration in terms of economic advisors and committees and so on, done a lot of work in Washington, DC. She is very much taking a wait-and-see cautious approach in terms of what the administration is saying. She confirmed that the intent or the goal investing heavily in infrastructure should have a dramatic effect on the economy overall, so she was supportive of that. The one question she had, and actually what she said was that her son on the way to school in the morning on the back of a napkin should be able to work out what the plan is to spend and at the same time reduce taxes without the other side of the equation is, to be charitable, going to require further definition. Gary: Wow, sounds like quite a conference. I'm quite envious that I'm not there to enjoy it with you this time, but maybe next time. Gavin, I really appreciate you taking time out. I know that there's a lot of people that you should be meeting with there, so I'm gonna go ahead and maybe end it right there for now. Maybe we can schedule another business chat soon. I know something's coming up with Moody's Analytics and yourself in June and the next release of the Main Street Report for Q1, so I'm excited to maybe talk about that in further detail with you very soon. Gavin: I look forward to it. Thank you very much, Gary. Gary: All right. Thank you very much.   If you would like to be informed of new episodes of Business Chat | Live be sure to subscribe to our YouTube channel, and follow us on Twitter.    

Loan stacking is a small but serious problem for Online Marketplace Lenders (OMLs). Often invisible to the issuers of commercial capital, businesses that engage in this insidious practice are significantly more likely to become delinquent on their payments and even default entirely on their obligations. If you manage a company that issues commercial credit, you need to be diligent in weeding out these bad players to protect not only yourself but your industry as a whole. What is Loan Stacking? Simply put, loan stacking is the opening of multiple credit lines within a short period of time. (Sometimes as little as 24 or 48 hours.) Because there is a natural lag in credit reporting, the lenders involved usually are unaware that other companies are transacting with the same customer. On the personal credit side, loan stacking is a potential problem for borrowers who run their multiple credit lines near – or up to – their maximums and then find they can no longer meet all of their monthly obligations. However, it’s not uncommon for individuals to carry multiple credit cards, and most credit card companies already have reliable systems in place to ensure borrowers don’t get more credit than their incomes justify. Things are different on the commercial side. Today, a lot of short-term borrowing occurs online through Merchant Cash Advances (MCAs). Repayment takes the form of weekly or even daily debits against the businesses’ cash receipts pulled directly from the borrower's checking account. For example, a restaurant may take out a $10,000 cash advance, the lender then taking five percent of that restaurant’s daily receipts until the advance is repaid – with interest. MCAs  are not technically considered “loans,” and thus are not subject to the same regulations and oversight as traditional commercial lending.  Such advances usually cover a period of four to eight months. Some can go as long as 12 months, but rarely do they go longer. MCAs are most popular among retail stores and have helped many small businesses get funding when needed. However, problems arise when a business takes out several cash advances at the same time. Instead of paying, say, 5 percent of daily receipts to a single lender, the restaurant loses perhaps 20 percent to four lenders simultaneously. At this rate, the business becomes unsustainable and defaults. Not only is commercial loan stacking a risky practice, it can be legally problematic. Many MCA providers are now placing anti-stacking language in their contracts that require borrowers to pledge not to promise their receipts to any other companies. Stacking loans violates this provision and thus may be tantamount to fraud. How common is commercial loan stacking? Based on our research and analysis, we believe that between five and six percent of all merchant cash advances are stacked. In 2013, the MCA market accounted for about $3 billion in transactions. By December 2016, that number had probably doubled. That means that between $150 million and $360 million in commercial loans are stacked. Granted, that's a drop in the bucket for the $1.9 trillion commercial lending industry, but for a small company just getting in the business of making such credit advances, it could be a serious threat to their portfolio's health. Why loan stacking occurs Why do MCA lenders allow themselves to be pitted against each other in this fashion?  Blame the internet. The same internet that gives us the benefits of virtually instantaneous credit applications, reviews and approvals also makes it possible for businesses to easily make multiple applications within a 24- or 48-hour period. Many commercial credit reporting companies may provide updates as quick as 24 hours in some cases, a commercial MCA lender receiving a cash advance application may experience a slight delay in knowing if other lenders are working with the same customer. As for borrowers, most don't stack because they are not intending to commit fraud or otherwise game the system. They're doing so because, at the time, they believe they have no choice. Running a small business is difficult. Businesses often operate on thin margins and owners may, at times, struggle to make payroll. If there's a sudden setback or cash flow suddenly stalls, an owner may need a sizeable cash infusion just to keep the doors open. Being an optimistic lot, most owners who get multiple MCA loans do so in the belief they can quickly get over the hump, recover their losses, rapidly pay back what they owe and no one will be any the wiser. Sometimes, this strategy works. But too often, it does not. And that's when things get nasty. How to avoid loan stacking customers If you are an MCA lender and wish to avoid loan stacking customers, you have three tools at your disposal: Before making a cash advance, ask to see a full year of checking account activity. If you see a pattern of weekly or daily debits in a similar dollar range, this could be a sign that the business already has an MCA in place. If the business is relatively new, check their credit report for a high number of UCC (Uniform Commercial Code) filings. A large number of hard credit inquiries often indicates the owner is doing a lot of loan shopping, and this can indicate loan stacking. Sign up for Experian's custom short-term industry specific risk model consulting services. Signs of loan stacking, particularly in young companies with excessive UCC filings, can often be spotted using this service. For MCAs and all other forms of commercial lending to work, all parties have to play by the rules. Discouraging loan stacking not only benefits lenders, but also the borrowers who depend on the services these lenders provide.

This year’s Marketplace Lending and Investing Conference explored issues of transparency, partnership, consistency and sustainability.  There was healthy debate on each of these topics and the audience, presenters and panelists frequently returned to the theme of the relationship between Marketplace Lenders, Fintech, Banks and Investors.  As the conference unfolded I thought about the role of small businesses in the relationship between these stakeholders.  How do mom and pop small businesses fit into these complex, rapidly evolving relationships? In mid-2015 The Federal Reserve of Cleveland published a report.  The title was “Alternative Lending Through The Eyes of ‘Mom & Pop’ Small-Business Owners: Findings from Online Focus Groups”.  The report found that the small business owners participating in the online focus groups had a number of common concerns: Marketplace Lenders’ sites are attractive … but how secure? How private is the information the small business provides? It is difficult to compare product offerings, features and pricing The small business owners bank is a source of advice but is not necessarily considered as an option for funding There are some clear parallels with the conference’s focus on transparency, partnership and sustainability.  See if any of these sound familiar: Regulators at the federal and state level are researching the Marketplace Lending industry and exploring ways and means of regulating the space. They are particularly focusing on issues of disclosure, fairness, privacy and governance.  The CFPB – Consumer Financial Protection Bureau has been particularly active.  There are two recent examples that illustrate increasing protection for small businesses. Dwolla was hit with a $100,000 fine in March of 2016, directly related to data security practices.  Then, in late September LendUp was fined $3.5 million for deceiving its customers.  The list of lenders who have strayed from fair and transparent business practices is long and growing.  Fortunately, regulatory supervision of the online marketplace is here to stay. Banks largely abandoned the small business segment post 2008. Lack of profitability is most often cited as the reason for the exodus.  Marketplace Lenders entered the space, delivered a wide range of product offerings, high levels of responsiveness and a relatively painless customer experience.   Now, eight years later, banks and Marketplace Lenders are partnering to make the most of their relative strengths – deep customer relationships and the capability to deliver exceptional customer choice and experience, through technology. Leaders in the various stakeholder organizations are still focused on surviving, meeting goals for growth, managing risk and optimizing returns.  In the past these may have conflicted with the small business owners interests.    In late 2016, they are in alignment … and that is good news for small business owners throughout the US economy. If you would like to hear more of what I learned at Marketplace Lending and Investing, check out the Live Marketplace Lending & Investing Q&A I recorded from the conference.          

Experian met with LendIt Conference Chairman Peter Renton recently and during our talk he shared some valuable insights on marketplace lending and the growing Chinese peer-to-peer lending industry. Why do so excited about the Chinese peer-to-peer lending industry? I think there are two things, one is that it is massive, the Chinese market is so big it’s bigger than the rest of the world, combined.  And so that, I think, it’s an opportunity for everybody, and western platforms and Chinese platforms. But that’s not all, I think one of the things I think is most interesting about China is how they use technology particularly in the mobile space. The way these platforms operate on the borrower acquisition side, on the investor side it’s all done through mobile. And that is very different to what’s done in the West, so we’ve got a lot to learn. The Chinese experience is probably 3 to 5 years ahead of what the West is going to be. We all talk about “Well, we are going to move to mobile eventually” but it hasn’t happened yet and you talk to most platforms and the still the majority of their traffic is coming from through the desktop so that’s not the case in China it’s something like 80% or 90% coming on mobile sometimes even more. Some companies have nothing other than mobile traffic, they don’t even have a website. That’s why I think China is interesting and we can really learn a lot from the Chinese. Will we start to see U.S. companies make investments in China? I think the first thing were going to see from U.S. companies is them trying to attract Chinese capital, that is already started we have already seen some Chinese capital coming in, there’s been publicly available information like with one of SoFi’s investors is a Chinese company. The Chinese are making more equity investments in this space, we’re also starting to see debt capital coming from China into the U.S., so that’s definitely I think one of the ways that we will be connecting the two countries. The other is eventually we’re probably down the road two to three years minimum we are going to see western platforms going to China and either buying a Chinese platform or starting operations there. We’ve seen all of the major banks have done that, China such a big market, it can’t be ignored. If you want to be a global player you have to be in China so I think that’s probably the secondary second step, the first step is attracting capital. Is the Chinese market primarily consumer lending or using lending to small business? So it’s similar to the U.S. where really the consumer lending sector has led the way in marketplace lending and I think the same thing is true in China. There is definitely small business lending in fact small business lending is probably even needed more in China than the West because small business owner’s, entrepreneurs in China have very few options when it comes to obtaining financing, so these platforms are setting up to really fill that massive void. What goal should marketplace lenders consider when partnering with traditional lenders? If you talk about traditional lenders if you are talking about banks I think that is something that we’re seeing more and more just at LendIt today we had a whole session on bank partnerships, there’s been several other mentions we had Avant’s Al Goldstein this morning talking about their new partnership with Regions Bank. Regions Bank is a top 20 bank in the U.S. I think what’s in it for the platforms obviously is, if you look at the Avant deal they get two things, they’re sort of licensing their technology and their underwriting box helping these banks reach difficult to obtain customers and underwrite customers in ways that a bank necessarily wouldn’t have the expertise to do. So they are doing that and then with Avant they’re also getting referrals so the bank may have people coming to them for loans that they can’t or won’t underwrite so then they can refer them on to Avant, so I think that’s the best example. You talk about the Chase OnDeck deal, I’ve spoken with Noah Breslow about that and he’s mentioned that it was a long process. Chase is the biggest bank in the country, they’ve got a massive compliance department, they had to check every single box and so I think platforms they really need to be like professional grade shall we say. All of their compliance systems – he said it took OnDeck many months to get up to the standard that Chase was comfortable with, so I think having that sort of rock-solid compliance in place it’s great for a platform not just by partnering with banks but dealing with regulators they can see that they are checking all the boxes just like a bank would. What can you tell us about the new Marketplace Lending Association? It’s something that I’ve been passionate about for a long time.  We are probably a year or two overdue on having this association coming to be, but it’s better late than never. I think we really need to come together as an industry and have a unified voice when we’re dealing with Washington, dealing with lawmakers. Every industry that has an association that can be heard in Washington that represents the entire industry and I feel like, we just started, we just launched it a few days ago but I think it’s overdue and having that will help us not only just raise up the profile of the industry but really help us to talk directly with regulators and regulators aren’t going to say this is just one company with their own agenda this is the industry talking and they’ll pay more attention I think.

I sat down with Gavin Harding, Sr. Business Consultant with Experian who is attending American Banker’s Marketplace Lending & Investing Conference in New York City this week to get his perspectives. Interview with Gavin Harding Gary: Hello and good evening my name is Gary Stockton and I’m with Experian Business Information Services in Costa Mesa. I’m joined by Gavin Harding who is with our global consulting practice. Gavin is at the Marketplace Lending and Investing show in New York, Gavin how are you doing in New York? Gavin: Good evening Gary it’s good to be here. It’s a tremendous show this year. Very high-energy, very dynamic a little different to some conferences that we’ve participated in over the last couple of years. So some evolving themes. Two years ago, three years ago at this type of conference it was all about growth. Maybe a year ago it became more about regulation and compliance, kind of a more pragmatic approach. And this year it has evolved one more time into a core question of sustainability. How can marketplace lenders build a solid foundation that incorporates compliance, growth, risk, basic core principles of governance to make sure they become profitable and that they are still here in 3 to 5 years? So it’s really interesting to see those themes emerge over the last couple of years. Gary:  So marketplace lenders it seems like they are getting their houses in order right? We’ve had a few things happen in the last six eight months that kind of rattled the industry but I think a lot of them have taken a step back from that rapid growth pace to get you know compliance and things like that in order, and a lot of them are pursuing partnerships with lenders right? Gavin: That’s right. So, some of the key drivers have changed over the last year have been some things in the news that kind of shook the industry up a little bit, caused both marketplace lenders themselves and the investment community and the banks and bank partners to stand back a little bit and pause, and address some really key fundamental questions. So, one of the questions, I want to take this from a bank perspective. There was a great program this morning. Four panelists -  one banker and three marketplace lending lawyers, and the question was about the interaction between banks and marketplace lenders, and it was really interesting questions that were asked and one of them was, if every marketplace lender has its core competency, it’s target market, the thing it does differently and better than anybody else the differentiator, the key question for the bank partner is how real is that? How do we know? How do we document that? So there’s definitely more of a, it’s great to share the story with the bank partner, now the bank partner is saying that’s great I like the story, now let me show or let me see some evidence how it works, show me that you are adhering to your model consistently. Show me that you were documenting what you’re doing. Show me that you are being fair and disciplined in your credit decisions. Prove to me that when you say your portfolio is grade A+, that it actually is grade A+. So, not so much a skepticism, more a real life pragmatism to fully engage with the marketplace lender and to understand their model down to a granular level in terms of process, in terms of business governance, management practices and so on. So I see it as a convergence of the new innovative approaches of marketplace lenders, and the more traditional approaches of banking. So I see the two as coming together being more engaged and aligning more closely and again that overall pragmatic approach is prevailing. Gary: Are you seeing, last year there were a lot of international companies starting to come on the scene there were a number of Chinese marketplace lending companies, is that kind of still the case or is it pretty much domestic US marketplace lenders? Gavin: So with this particular event this year it seems it’s mainly U.S. based however there are some global players. I’m not seeing a lot of participants and attendees from Asia for instance where at prior events we would have seen more of them. Gary:  And so looking at the agenda are there any sessions that you personally are looking forward to? Gavin: Today the one that really resonated with me was the session on bank partnerships, exactly how they can work and the one theme that was a central core statement from that is, compliance is now a price of entry. Compliance is not a want to have. The marketplace lender has to have solid documented procedures in place to have a conversation with a bank. This doesn’t mean that there needs to be an exact mirroring of the bureaucracy and really deep compliance processes in a bank, but it means that the marketplace lender has to understand the banks perspective, has to speak the banks language and needs to understand the regulations with which the bank is complying. That’s now the expectation from banks of their marketplace lending partners. And that changes the world significantly for them. There is a demand for better alignment and mutual understanding, high levels of transparency and the application of fundamental principles of management and good governance so for me that session today resonated. I think it was a long time coming, and it was good for the group to hear that. Gary: That’s great so you’re there tomorrow and you’re speaking at the conference right? Gavin: Tomorrow afternoon we have a session that should be pretty interesting, it’s a panel session and it is centered on building sustainability in your portfolio. Let me tell you kind of where that comes from and why we’re talking about this. So there has been over the last year and a half, a tightening in terms of the availability of capital for marketplace lenders, a heightening in the demand from investors and from bank partners and others, heightening in the demand for additional information and more granular data on what’s in the portfolio, portfolio content, predictive performance, risk profiles and so on and so forth. To continue to address those needs marketplace lenders need to look within their portfolio to add components in terms of reporting, in terms of upfront origination discipline, ongoing management so that as they approach partners to look at these portfolios and invest in them, the partners can gain a level of confidence that the portfolios are as presented. So tomorrow I will be speaking with two other panelists, one from the world of regulation compliance in an advisory capacity working for a law firm in DC with a long history of working in the regulatory and supervisory market. And the perspective of the other panelist is from a firm that assesses portfolios, stress tests portfolios, establishes valuations and so forth, again related to our conversation on investment, the investment community, the reduced availability in capital of capital and the demand for more information and then I’ll be giving some examples of some work we’ve done with clients in terms of trying to understand the portfolio. Of presenting the portfolio in industry-standard approaches, industry-standard scores, industry-standard analytical approaches that can help bridge a portfolio to the investment community, and help that investment community gain a level of comfort that they need. So I think it will be a lively discussion, I think we got some great diversity in the panelists, and from what I saw today I think the audience is going to be very engaged and ask some tough questions. Gary: That’s great so do you think you might have time tomorrow to give us another recap from the event? Gavin: I’d look forward to that. Gary: OK. Well I want to thank you for taking time out I know that you very busy there it’s in the evening so thanks for staying back and giving us your update and we’ll look forward to another chat tomorrow around the same time. Gavin: You’re welcome thank you Gary.