[Editor’s note: This is a guest post from Jim Salters, CEO of The Business Backer. The Business Backer is a bronze sponsor and will be in attendance at LendIt USA 2015 on April 13-15. In this post, he talks about the inevitability of regulation.]
Let’s face it: many alternative small business lenders, funders, and brokers have developed a bad reputation. This has put our industry at risk. Words such as “dishonest” and “predatory” are used by the media to describe our industry with alarming frequency. A $17,000 Apple Watch is considered an achievement while a higher cost alternative loan is seen as inherently evil. This is the world we live in, whether we want to acknowledge it or not.
It should be no surprise that the calls for oversight and regulation are increasing. Back in January, Chicago Mayor Rahm Emanuel publicly called for increased state and federal regulation of alternative small business lenders to protect small business owners from predatory lending practices. No matter how “different” any one of us may believe we are, bad actors can create a negative perception of the entire industry. The actions of a few can cause all of us to suffer.
The good news is that we don’t have to re-invent the wheel. Industry collaboration and self-regulation through best practices can draw a clear distinction between “good” and “bad” actors. There are success stories from the equipment leasing and consumer lending industries of productive and successful dialogues leading to education about best practices with government agencies. We are not starting from scratch.
The bad news is that it will not be easy. I’ve been outspoken at recent industry conferences when sharing my opinion that the need for industry collaboration is urgent. Working together to self-regulate is necessary as it will level the playing field and minimize outside oversight. Through my participation in formation meetings focusing on this kind of industry collaboration, I’ve heard the objections you might expect: prime or near-prime alternative lenders don’t want to be associated with sub-prime lenders; business lenders don’t want to be associated with consumer lenders; or the belief that our industry will always be exempt from further oversight because we participate in a commercial transaction between two businesses. Competing products, business models, and target markets make collaboration a challenge.
Collaborating will not be cheap either. It takes a significant amount of funding to facilitate meetings, communicate with lawmakers and government agencies, maintain and enforce best practices, and promote the industry through PR or marketing in the face of media hyperbole and ignorance. But what is the cost of NOT doing something?
What might topics for industry collaboration be?
Transparency
Transparency is essential to the long-term health of our industry, but is the hardest topic to develop a consensus around because of the sheer variety of products and legal structures offered by alternative business lenders. What might transparency mean?
Should disclosure of rates and fees be standardized in some way? Is showing the cost as a fee and total payback amount less transparent than showing an APR as some industry commentators would argue? I’m not sure about that. What I am sure about, however, is that it is our duty as an industry to minimize customer confusion and deception when it comes to rates and fees. We need to go above and beyond to make sure our customers know exactly what they’re dealing with.
Should broker or intermediary compensation be disclosed to the end customer?
How do we respect the fact that a full personal repayment guarantee is a very different “cost” to a business owner who ends up defaulting on their obligation compared to a product that does not carry personal repayment guarantees?
Should personal liability be disclosed in a standardized way?
Can we make progress as an industry on any aspects of transparency before someone else tells us what we have to do?
Information Security and Privacy
As an industry, how damaging would a high profile data breach involving tens or hundreds of thousands of small business owners’ personal and business data be? To me data security should be relatively easy to achieve, as so many industries already have best practices in place to protect customer information. The amount of personal and business information floating around unencrypted or not secured at all is a disaster waiting to happen.
Advertising and Marketing Claims
False and misleading claims are not unique to our industry, but they certainly get the attention of the Federal Trade Commission (FTC). We should be able to agree that no one benefits in the long run from bogus claims.
Brokers, Referral, and Lead Providers
Are there minimum standards or expectations to which we should be holding our outside partners?
At The Business Backer we are doing all we can to continue this dialogue with our peers so we can get ahead of potential changes and champion workable solutions. We invite you to make it a priority in 2015 to engage in these industry discussions with us. If we make the effort to work together, our industry can set its own agenda for self-regulation and oversight, rather than invite others to do it for us.
