Online lender Kabbage Inc.’s ambition to enter payment processing by the end of the year, reported this week by Reuters, is a logical extension of their current platform, but one clouded by a host of uncertainties and rife with potential missteps, according to experts contacted by Digital Transactions News.
Nine-year-old Kabbage already has an extensive foothold among small businesses, the bread-and-butter market for independent sales organizations, independent software vendors, and other marketers of payment acceptance. The firm uses speedy data analytics to assess the creditworthiness of small businesses, then extends fast loans of up to $250,000. As of late last year, Kabbage reported having lent a total of $4 billion to more than 130,000 businesses in a wide range of industries.
Now it sees payments as a natural extension of its business that can rely on the same data, analytical tools, and personal relationships it has already developed. And the addition of a stream of payments-related data could enhance its core business. The move “makes a lot of sense,” says Rick Oglesby, principal at AZ Payments Group, Mesa, Ariz. “The big reason is if you can see the payment-processing data, you’re in a better position to lend.”
The reverse of this approach is not novel. Payments providers like PayPal Holdings Inc. and Square Inc. have entered the small-business lending market in recent years, counting on current relationships to help assess underwriting risk. And ISOs have for years offered clients loans from third-party providers.
But Kabbage’s entry into payments could represent formidable competition. The company did not offer specifics in the Reuters interview, and it did not immediately return a request for comment from Digital Transactions News. Still, the company is well enough capitalized that it could enter processing via an acquisition, suggest Oglesby. It would take a “decent-size check,” though, he points out. “Multiples are high.”
Kabbage has been willing to buy at least some of the pieces it might need for a foray into payments. In April, it acquired Orchard Platform, a New York City-based developer of data-analytics and –visualization software that some say could prove crucial not only for loan underwriting but also for managing payments-processing risk.
“Kabbage will apply [Orchard’s] forecasting and predictive analytics engine to enhance internal operations for greater efficiency and effectiveness, strengthen its automated underwriting platform, inform and guide future products, and offer its customers data-driven insights…” the company said in a press release about the deal. No acquisition price was announced.
Much, however, depends on the approach Kabbage takes. Jared Drieling, senior director of business intelligence at The Strawhecker Group, an Omaha, Neb.-based consultancy, says the lender could follow a “retail ISO” strategy, in which it would depend on a third party for back-office functions like underwriting and customer service. That’s “not a huge jump,” he says via an email message. “They would also not be held accountable for merchant fraud or losses, but on the flip side they would see a smaller share of the overall cut.”
The alternative approach would be far more ambitious but also potentially more rewarding. “A wholesale model would require them to provide their own back-office services with direct processor and bank sponsorship,” says Drieling. “They would also own all of the risk, but it’s a more lucrative option.”
However Kabbage enters payment processing, its biggest risk could simply be the market’s heated competition. “Ultimately, if they do proceed into the space, they will be in one of the most competitive sectors within payments, the [small-and-medium-size business] space,” says Drieling. For that reason, he predicts the company will likely follow a referral model.
“In a sense, Kabbage will become an integrated payments partner or ISV partner that is offering processing through this acquiring partner,” he says. “I suspect that a lot of legacy providers have Square Capital and Shopify Capital on their radars and a Kabbage integration would make sense for them.”
Potential sponsoring processors could find Kabbage’s existing client base attractive. “These processors would have access to a large customer base of U.S. small businesses to cross-sell to,” Drieling says.