Surprising Stats of 2023

Remember when interest rates soared, banks collapsed, and experts began to prepare for the worst? Well, appearances can be deceiving.

Business loan origination volume at Square, Enova, Shopify, and Funding Circle are all on track to surpass 2022’s numbers. When it came to bad debt, PayPal was the only large tech lender to announce that it had become a problem this year. PayPal’s origination numbers are consequently also down year-over-year.

The S&P 500 was at 3,839.50 one year ago and closed at 4,774.75 yesterday, a gain of more than 24%.

Unemployment was 3.5% last December and had only modestly increased to 3.7% this November.

Inflation was 7.1% last November and only 3.1% this November.

Bitcoin is up by 150% year-over-year!

Anecdotal reports at smaller non-public small business funders, however, have hinted at bad debt increases all year and underwriting has generally become more conservative. Despite this, brokers are still brokering deals and funders are still funding. The predicted mass AI-induced layoffs have also not yet materialized. In the grand scheme of things, the argument could be made that 2023 was actually a pretty good year.

But 2024 could be dicey.

• The FCC closed the lead generator loophole.
• The first wave of small business finance companies will have to begin complying with new CFPB regulations.
• It will be a presidential election year like none ever experienced before.
• Americans are overleveraged. Forty percent of student loan borrowers failed to make a payment after the covid-era pause ended.
• General economic, societal, and political unease.

So what will happen? I guess we’ll find out. It could be terrible or awesome or anything in between.

A Fun QSR Chain or “Big Sandwich”?

As the small business financing space contemplates competition from merchant-integrated platforms like Square, Shopify, and Intuit, one behemoth is taking over the franchises themselves. The company is Roark Capital, an Atlanta-based PE firm with $37B in assets under management, and they taste delicious.

Roark Capital already owns Arby’s, Auntie Anne’s, Baskin-Robbins, Buffalo Wild Wings, Carvel, Cinnabon, Carl’s Jr., Hardees, Culver’s, Dunkin Donuts, Jamba, McAlister’s, Moe’s Southwest Grill, Schlotzky’s, Seattle’s Best Coffee, Jimmy John’s, SONIC, Jim’n Nick’s Bar-B-Q, Miller’s Ale House, North Italia, Nothing Bundt Cakes, and the Cheesecake Factory. Three of those are among the top fast-food sandwich chains in America (Arby’s, Jimmy John’s, and McAlister’s Deli). Roark is also presently in the process of acquiring Subway, the leading company in that category by nationwide sales. The deal was announced in August.

But now the FTC is saying not so fast on the basis that it might create a monopoly. According to Politico, “the government is focused in part on whether the addition of Subway gives Roark too much control of a lucrative segment of the fast food industry.”

“We don’t need another private equity deal that could lead to higher food prices for consumers,” railed Senator Elizabeth Warren on social media. “The FTC is right to investigate whether the purchase of Subway by the same firm that owns Jimmy Johns and McAlister’s Deli creates a sandwich shop monopoly.”

While many comments on social media made fun of this regulatory effort, perhaps such consolidation is a wakeup call for the small business finance industry. Once upon a time the textbook definition of a non-bank funding merchant was a restaurant or QSR sandwich shop. Although the target customer has broadened considerably since then, it may be worth keeping in mind that a large diversified portfolio of QSR funding customers might not be so diversified at all. Behind the scenes, it may actually all be a single counterparty. A small business might not be so small. You could be dealing with Big Sandwich.

Impact of ChatGPT Era Already Being Felt

Anyone that’s ever faced a coding hurdle has inevitably ended up on Stack Overflow, the go-to platform for developers to solicit answers from more experienced professionals about their challenges. Users typically explain what they’re trying to accomplish and paste a copy of the code that’s not achieving the desired result. That’s where the community chimes in, coming forth with their own solutions while other users upvote the best answers. The end result is not just a grateful user but an ever growing public database of questions and solutions available for public consumption. The sheer scope of what’s been compiled has opened up the door for other users to simply find a similar enough question that’s already been asked and copy the answer. It’s a very valuable tool.

Stack Overflow has been around for 15 years but from March to April of this year, traffic plummeted by 17.7%, according to SimilarWeb. Tech blog Gizmodo has suggested that a contributing cause is ChatGPT-4, the OpenAI chatbot technology that can write its own code, edit a user’s code, and even converse about what a user is trying to accomplish. A spokesperson for Stack Overflow confirmed to Gizmodo that ChatGPT was partially responsible for its loss of users. “However, our vision for community and AI coming together means the rise of GenAI is a big opportunity for Stack,” the spokesperson added.

But what’s a coding forum for nerds and brainiacs got to do with the lending industry? Well, for one thing borrowers were already flirting with asking virtual assistants for help with financial services products before ChatGPT even entered the ring. According to the most recent Smarter Loans survey, 16% of loan applicants surveyed said that they had at some point used Alexa, Siri, or other voice search tools to find information about financial services. None of those come even remotely close to what ChatGPT-4 is able to do. And AI is popular, so popular in fact that ChatGPT became the fastest growing app in history, crushing even the likes of TikTok in pace of growth. ChatGPT already had 100 million monthly users as of February, before its signature ChatGPT-4 model was released.

Therein lies the threat because not only is ChatGPT-4 incredibly adept at making coherent conversation but it is also ready to explain a concept or make a recommendation, just like a very knowledgeable friend would. For example, when asking it to make a list of the top small business funding companies, these were among the names it spit out:

• OnDeck
• American Express (Kabbage)
• Funding Circle
• Credibly
• Square Capital
• National Funding
• PayPal Working Capital

It’s not a vomit of names. ChatGPT-4 was familiar with their areas of expertise. When pressed further it said that OnDeck would help get the cash fast but working with Square Capital might work better if one is processing a high volume of credit card transactions. For strong credit and a large loan, it suggested Funding Circle. After expressing an interest in OnDeck, the AI provided instructions on how to apply via the OnDeck website and a phone # to call with questions. In this real-world example, the AI replaced both the online search and the role of a broker all in one and all within minutes. It can also read the contracts and alert borrowers to certain clauses. When pressed about an unusually high APR, for example, the AI even offers an encouraging explanation for how moving forward could still make sense.

“Be sure to also consider the potential return on investment from using the loan funds,” it said. “If the growth or savings you anticipate from using the loan funds exceeds the cost of the loan, it may still be a good decision despite a high APR.”

A Glimpse At How Big Fintechs Are Approaching The Small Business Loan Market