Earlier in the week Spain based banker Santander UK and Kabbage, a US fintech startup that operates same-day business credit lines announced a partnership that sees Santander implement Kabbage's lending platform to provide same day loan decisions on amounts varying from £500 and £100,000 to small businesses (SMBs) in the UK. The service is due to come on line in a couple of months. Will they blend? That's an open question.
This is not the first time Santander UK has dipped its toes into unconventional waters. In 2014, Santander announced a referral operation for SMBs with Funding Circle. For its part, Sage Small Business Loans announced a tie up with Kabbage in May, 2015 for credit lines between $2,000 and $100,000.
Obtaining a credit line online in real time sounds alluring but I am not convinced this represents an offering that will work as well as Santander or Kabbage would like.
Fees and interest rates charged by Kabbage are in what I would euphemistically describe as loan shark territory with a vig that can go as high as 12% per month. I'm sure Santander will have negotiated a different deal but even so, I can't see why it would step materially away from the rates Kabbage charges either directly or indirectly in other markets. If it did then it would be cannibalizing Kabbage's business model.
Kabbage uses PayPal and eBay history as the starting point for risk analysis. That automatically puts its target market into a retail niche currently occupied by occasional vendors and home based sellers of surplus goods. That might not be a bad thing for someone who wants to modestly expand their activities. There's a gotcha. Potential lenders must provide Kabbage with access to their PayPal and eBay histories. I can't see that flying from a security standpoint. HEre's what Santander said on its corporate announcement site:
Our collaboration with Kabbage aims to provide UK businesses with the ability to draw down funds as and when required, whether this be covering a short-term funding need or enabling them to seize growth opportunities as they arise.' Kabbage speeds up lending decisions using risk scoring determined by Santander, with the fintech company's own information and external sources of data, including social media.
I have seen this kind of partnership work well in the Netherlands when Rabobank teamed with Twinfield for early close on lending deals. Rabobank was given access to key Twinfield recorded data for risk mitigation purposes as a condition of lending. That's a much better approach because it takes into account all the business parameters that make up a lending decision, not just a one or two dimensional records approach that must, by its very nature, obscure the business reality.
There is another twist to this. Online accounting services are now at a point of maturity where the business owner can get relatively quick advice from professional accountants who specialize in advisory services. While the Santander/Kabbage 'quick fire' offering might be good for very small amounts needed over a short period of time, business can use those specialists to plan for lending, rather than having to take what would otherwise be an ad hoc decision.
Finally, I wonder how Santander will position this offering within its current loans portfolio. Right now, the bank will offer competitive terms that reflect current market interest rates. Will it trade convenience for a modest markup or use the Kabbage rates? We don't know but if it uses the latter then it wil likely be no more competitive than your average credit card.
I give Kabbage and Santander credit for solving a timing problem, but I can't see how this will be a rip roaring success. There are too many gating factors in the way, regardless of how seamless the lending process becomes.
As an endnote, we are starting to see many experiments that involve fintech businesses teaming up with legacy banks. There will be many more examples in the months and years to come but these are very early days and we should therefore expect to see a significant degree of failure.