ATLANTA —In a recent report, payments research and advisory firm Mercator Advisory Group revealed that the modest growth in U.S. small business credit card markets may be obscuring a widening gap between financial institutions’ small business finance offerings and the evolving needs of today’s small businesses. The report, titled “Small Business Credit Cards: The Key to Richer Customer Relationships,” describes the current financing landscape, the challenge small businesses face managing uneven cash flow, and the recent shift toward alternative (nonbank) lenders, as well as single-digit growth in credit card purchase volume. It also discusses the role that data, technology and analytics can play in solving this issue.
In today’s complex environment, financial institutions are pressed to address the evolving preferences of small businesses. The report points to nonbank lenders as offering a viable alternative to the lending processes of traditional financial institutions, especially for startup businesses and sole proprietorships. Additionally, recent declines in issuers’ small business card accounts and outstanding balances highlight the tenuous state of the U.S. small business credit card market, and reinforce the need for more innovative product development and account acquisition initiatives at banks. In that regard, the report points to challenges bank organizations face in tying an identity to a small business, and calls for the use of data layering as a solution.
The Mercator Advisory Group report cites LexisNexis® Risk Solutions as an example of a company with effective small business risk information. LexisNexis Risk Solutions is uniquely positioned being approved by the Small Business Financial Exchange, Inc. as an SBFE Certified Vendor™, enabling the data, technology and analytic linking company to blend its small business alternative data with SBFE Data™ on business financial performance data. The report stated: “All of the nontraditional data currently being utilized by alternative lending platforms is readily available to issuers, but aggregating all the potential data sources and finding the most predictive ones can be a complex task. Mercator recommends that issuers avoid social media data and Yelp reviews to start, and instead focus on supplementing traditional credit data with more structured alternatives. One example is the public record and identity data available from LexisNexis Risk Solutions, which can be layered on top of a traditional business credit file to create a more comprehensive view of the business and all of the people and records associated with it. Infusing even a minimal amount of alternative data into the risk evaluation process can make the difference between booking a new account and discouraging a prospect from ever again applying to your institution.”
Ken Paterson, vice president, research operations, Mercator Advisory Group, adds, “small business owners are obsessed with the survival and growth of their companies. They typically don’t think or care about credit—until they need it. Our research suggests once a small business owner identifies a need for credit, the person is likely to become extremely focused on obtaining it in the most expedient manner possible. Any lending technology, analytics, or data that can streamline the process of getting credit into small business owners’ hands is extremely valuable.”
Ben Cutler, senior director, small business credit risk decisioning, LexisNexis Risk Solutions, comments: “It’s been said that small businesses are the V-8 engine of the U.S. economy, providing an estimated 60 to 80 percent of U.S. jobs and powering local and regional economies. As lenders refocus on lending to small businesses, it’s not just about keeping bad risks from entering into the credit system—it’s also about expanding the addressable market by finding those small businesses that would be most likely to repay, but have been on the fringes because they simply don't have the traditional credit bureau trade lines. Our research shows there are millions of these businesses out there. In fact, the number of small business with a thin-or-no credit history is significantly larger than the pool of businesses with a thick-file credit file. It’s my belief that we can bring many of these thin-file and no-file small businesses into the financial system using alternative data sources—fostering small business financial inclusion without adding additional risk into the financial system. For example, products such as LexisNexis Risk Solutions Small Business Credit Report with SBFE Data™ or Small Business Risk Attributes enable lenders to effectively assess credit risk in these thin and no-file businesses and expand their customer base.”
If you want to bring more small businesses into your institution without introducing additional risk, please reach Ben Cutler at firstname.lastname@example.org.
About LexisNexis Risk Solutions
At LexisNexis Risk Solutions, we believe in the power of data and advanced analytics for better risk management. With over 40 years of expertise, we are the trusted data analytics provider for organizations seeking actionable insights to manage risks and improve results while upholding the highest standards for security and privacy. Headquartered in metro Atlanta USA, LexisNexis Risk Solutions serves customers in more than 100 countries and is part of RELX Group, a global provider of information and analytics for professional and business customers across industries. For more information, please visit www.risk.lexisnexis.com.