In fintech’s early years, much of the innovation focused on consumers. The technologies, though, are equally potent for small business, and a few startups pioneered that space. Today’s guests have been at the forefront.
They are the cofounders of Kabbage -- CEO Rob Frohwein, and president Kathryn Petralia. We recorded our talk at this year’s LendIt conference, which set up a podcast studio right on the floor of the exhibit hall. We had a lively conversation there as hundreds of people came through to see the latest ideas in financial technology.
Small business owners have always tended to be underserved by traditional lenders, especially for smaller loans. That’s because it’s always been time-consuming and complex to underwrite them. Unlike consumer lending, the sector has lacked efficient, standardized credit scoring mechanisms. There is high variability among enterprises, so that it takes a lot of effort to understand their business models, markets, and risk factors. Often, business information is mixed with owners’ personal finances, which can further complicate analysis. New small businesses also have high failure rates, making careful underwriting critical. In addition, very small businesses often maintain their records in non-electronic form, making it hard to gather all the needed information and to analyze trends. (Happily this is changing, thanks in large part to Square inventing its mobile-phone based reader that turns mobile phones into point-of-sale checkout terminals and then feeds the information automatically into computerized records.)
Traditionally, in short, it has taken as much work to underwrite a small loan as a large one. That means the profit margin on the former is low -- sometimes even negative. Banks and other traditional lenders have generally not been able to meet the needs at the low end of the scale.
That’s a problem for the businesses, of course, but it’s more than that. It’s a problem for the economy as well. Small businesses create 65 percent of all new jobs in the United States. Developing more efficient, accurate, accessible, affordable and transparent sources of financing can drive widespread wellbeing and growth.
Enter... Kabbage. In 2008, Rob and Kathryn realized that new technology could transform this space. Specifically, they saw that APIs were making it possible for businesses to allow access to information in their financial accounts to third parties from which the company wanted services. A lender like Kabbage can efficiently evaluate the business’ situation, including inflows of revenue, expenditures, and stability or volatility. With these techniques, it becomes profitable to make loans under $250,000, and that is exactly what Kabbage does.
In our conversation, Rob and Kathryn tell their story, on how they’ve built a company that has extended $6 billion in credit to 165,000 people in the United States. They explain how they started with e-commerce companies and now service all small businesses. They describe their gradual realization that their loans can help these businesses manage cash flow -- a critical need. And they share their thinking on the regulatory challenges ahead for the space, including the risk that new regulation will stifle innovation.
They also describe founding the Innovative Lending Platform Association, which allows lenders to disclose to their customers exactly what their pricing is across multiple products, to foster the transparency and trust on which the future of fintech will depend.
In the same vein, Kabbage participated in the study released just last month by FinRegLab (note that I chair FRL’s board of directors). That research evaluated the value and fairness of using cash-flow data in credit underwriting. The results are very promising on the potential of these new technologies to help make loans available to creditworthy consumers and businesses -- applicants who would be denied under traditional information models.
Also note that we have a show coming up about the new book out on small business and fintech from Karen Mills. This will be our second show with Karen, who is the former head of the US Small Business Administration and is now at the Harvard Business School. Karen has just published Small Business, Fintech, and the American Dream, which explores many of the same innovations we discuss in today’s show.
Kathryn Petralia was an English major in college (like me, actually). Today she is one of the most prominent women founders in fintech, and so we also talked about diversity in the field, including the growing awareness that diverse workplaces produce tangible revenue benefits.
Shortly after we recorded this show, Rob gave a talk at LendIt called, “Might Need Glasses, Your Vision Sucks,” helping companies find a clear corporate vision. As you’ll see in our talk, he and Kathryn do not lack for vision!
Hummingbird Diversity Manifesto
More on Rob
In 2008, Rob Frohwein recognized that companies like eBay offered automated access to small business transaction data via APIs. Rob realized that using this technology, small businesses could simply share this data to allow underwriters to make better, faster credit decisions and provide a great user experience for borrowers. He co-founded Kabbage in Atlanta, Georgia to leverage this power of real-time data automation through technology, and has since expanded the business to serve all small businesses throughout the U.S.
Today Kabbage has provided over $6 billion to 165,000 customers in the US. The company has also licensed its technology to large, global banks such as ING and Santander so they can provide the same experience to their small business customers. Kabbage's technology now powers automated small business lending in Spain, the U.K., Italy and France.
Rob holds a law degree from Villanova University, where he graduated Magna Cum Laude. He is the listed inventor on ten United States patents and has co-authored three books on intellectual property. He has been recognized four times as one of the top 300 intellectual property strategists globally by Intellectual Asset Magazine. As Kabbage expands and continues to support more small businesses, Rob ensures the company remains faithful to its vision, and that it maintains its unique culture, including a considerable laughter quotient.
More on Kathryn
Technology has played a role in Kathryn Petralia's life since her parents gave her a TRS-80 computer at age nine. When Rob Frohwein shared his idea for Kabbage with Kathryn, she immediately saw the value in using technology to reexamine lending. She believed funding decisions could be automated based on access to real-time data generated by numerous business operations, rather than a lengthy, manual process.
Before co-founding Kabbage, Kathryn spent nearly 15 years working with large and small companies focused on credit, payments and e-commerce. An English major (and Kabbage's resident grammar expert), Kathryn returned to her interest in technology to found a number of successful startups.
She also served as Vice President of Strategy for Revolution Money, an Internet-based credit card startup, and was a corporate development executive with CompuCredit Corporation, where she was responsible for entering new markets, developing products and establishing strategic alliances.
As someone who camped her way down the west coast to launch an e-commerce startup in the mid-90s, Kathryn can appreciate the lengths to which small businesses have gone to access capital.
More for Our Listeners
I hope you enjoyed today’s show. Remember to leave us a five-star rating on your podcast platform so we can help more listeners find the show. Also come to our website to subscribe to Barefoot Innovation -- our newsletter, podcast and updates, and please follow me on Twitter, LinkedIn, and Facebook.
We have great episodes coming up. We’ve talked with Karen Mills of Harvard Business School. This is our second show with Karen, too, and one we were eager to do because she has a new book out on fintech and small business. We recorded a fascinating show with Ida Rademacher of the Aspen Institute alongside Jamie Kalamarides of Prudential. And we have Vinny Lingham, co-founder and CEO of Civic -- an identity protection and management startup.
Here are some upcoming events where I’ll hope to see many of you. Remember, if you’re interested in booking me to speak to your group, contact firstname.lastname@example.org.
NFCC Connect Conference, September 16-17, Washington, DC
FFIEC International Banking Conference, September 24-26, Arlington, VA
Massachusetts Bankers Association New England Conference, September 25-27, Stowe, VT
University of Michigan’s Central Bank of the Future Conference, October 2-3, Ann Arbor, MI
Online Lending Policy Summit, October 23, Washington, DC
Money 2020, October 27-30, Las Vegas, NV -- I’ll be chairing the regulatory track again this year and also keynoting the day, which has been moved, happily, to Tuesday. We will have an amazing line up for you in our sessions as well as luminaries on the main stage, including FDIC Chairman Jelena McWilliams. So stay tuned!
The views and opinions expressed during the Barefoot Innovation podcast series are solely those of the individuals involved and do not necessarily represent those of Barefoot Innovation Group and its employees. Barefoot Innovation Group does not verify for accuracy the information contained in the podcast series. The primary purpose of this podcast series is to educate and inform.