Fintech companies have an ethics challenge, both perceived and real. The Fintech ethics battle to be perceived as fair and ethical is playing out in the Wild West of online debt for small, young and disadvantaged businesses.
We recently wrote about the Small Business Borrowers’ Bill of Rights. In this post we’re going to compare that with two other Fintech ethics standards that were developed after the SBBBR: the Marketplace Lending Association’s Industry Practices as well as the Innovative Lending Platform Association’s Code of Ethics. There are three important issues:
- Who is behind them
- What is similar
- What is different
The Fintech Ethics Battle Players
The Small Business Borrowers’ Bill of Rights is signed by a total of 89 organizations:
- 22 Fintech companies serving small businesses
- 30 CDFIs (including one CDFI that is also a Fintech company), for whom mission to serve community comes before profit
- 7 other financial services providers
- 31 “organizations do not provide financing services to small businesses but they care deeply about responsible business lending.”
The Marketplace Lending Association includes both consumer and business Fintech companies:
- 4 small business lender members
- 8 consumer or real estate lender members
- 7 associate members
The Innovative Lending Platform Association has the smallest number of members, just 7 Fintech companies:
- 5 small business lenders
- 2 lending technology platform providers.
Here is how the lines have been drawn among Fintech small business lenders:
- 22 support the SBBBR, of whom 4 also support the MLA
- standing alone are 5 ILPA supporters.
You may want to come back to this as a “shopping list” after you read the analysis below. Click on a company name to go to their web site.
Fintech Small Business Lenders’ Ethics
Common Fintech Ethics Themes and Details
It’s clear from reading the three documents that the Small Business Borrowers’ Bill of Rights (SBBBR), which was released in 2015, set the stage for the other two documents which came out later. At a high level, there are important similarities:
- Transparent disclosure of details to customers is critical
- Customers should be treated fairly
- Capital should be provided responsibly
- No discrimination
And there are also some important details where they are similar:
- No pressure sales tactics
- Assistance when businesses want to prepay
Significant Fintech Ethics Differences
It’s clear that the SBBBR sets a much higher standard for lending to small businesses. The MLA is close but leaves out some details. The ILPA has some glaring differences that should make small businesses suspicious.
- The ILPA essentially says its members should disclose “double-dipping,” where the SBBBR says “don’t do it.”
- The SBBBR specifically calls out “short-term products may be well suited for short term use, but not for long-term recurring use.” We’ve seen ILPA members specifically market short term loans for long term equipment purchases – a complex topic we’ll cover elsewhere.
- The ILPA has a sub-sub-note on vetting collections agencies, but it merits a full Topic #6 in the SBBBR.
- The ILPA is silent on referrals to other lenders or brokers, a sub-topic in SBBBR.
- The SBBBR and MLA both say lenders should report repayments to credit bureaus but ILPA is silent on the topic.
Another big difference: the ILPA very specifically has a disclosure product called Smart Box(tm) which it says is meant to provide “comprehensive pricing disclosure.” Included in the disclosures is their measure of “cents on the dollar,” which is a marketing approach to selling short-term loans when longer term loans may be a better fit.
In addition the ILPA takes issue with cash advances and factors, which is absent from the other two documents:
- “Marketing, solicitations and sales materials should not refer to or portray cash advances, factoring, purchases of receivables or purchases of future receivables as “loans,” “credit”, or use any other term that would reasonably lead a small business into believing they are being offered a loan.”
Finally, the Marketplace Lending Association has some very substantial additions that are relevant for their members who are attracting investors as a source of capital to provide the loans.
- The MLA starts with a large section on Investor Transparency and Fairness
- There are also big sections on “Safety and Soundness,” “Governance and Controls,” and “Risk Management” which address internal management issues needed to provide investors with piece of mind.
Use Fintech Ethics as a First Screen
Our conclusion is that in the uncharted territory of Fintech small business lending, you should use the Small Business Borrowers’ Bill of Rights as a first screen. Use our list above, or go to their page of signatories to shop for an ethical provider of small business debt. There are enough options available there that you don’t need to risk being taken by a digital loan shark.