What JPMorgan’s latest moves reveal about the future of online lending

U.S. banks have long used automation to pre-approve consumers for their credit cards. Now, JPMorgan Chase takes the same concept and applies it to online small business loans up to $ 200,000.

The idea of ​​computerizing lending decisions for small businesses is of course not new; digital lenders like Kabbage and OnDeck Capital have been in this industry for about a decade. Custom pre-approvals are not a breakthrough either; PayPal and Square have similar loan offers to their small business customers.

Yet Chase’s recent decision to engage in this business by extending a trial she conducted with OnDeck marks a key moment in the evolution of digital lending in the United States.

It’s not just because other banks are likely to follow Chase’s lead. Wells Fargo already offers a similar online loan product to small businesses. It’s not just because of Chase’s tall size, either; the New York mega-bank has more than 4 million small business customers.

Chase’s decision is also significant because it heralds the development of a two-tier market for borrowers who want quick access to liquidity.

Customers with sufficient credit will likely be able to obtain funds quickly from a bank and will likely pay relatively low interest rates. Meanwhile, the most fragile customers will likely continue to turn to websites operated by non-bank organizations that offer more expensive credit.

JPMorgan Chase CEO Jamie Dimon reinforced this theory in a recent interview with Crain’s Chicago Business. “Remember, there is nothing online lenders can do that we can’t do,” Dimon said.

“There are reasons we won’t do some things others will do,” added the 61-year-old CEO. “Sometimes the loans are too small, the credit [risk is] too high, regulators don’t like it.

Chase started offering online loans to small businesses 16 months ago as part of a pilot with New York-based OnDeck. The companies announced on Monday a four-year extension of the partnership. The product is marketed under the name Chase Business Quick Capital.

“The pilot has been incredibly successful in terms of dramatically improving the customer experience,” said Julie Kimmerling, product manager of Quick Capital, in an interview. “In addition, we are seeing greater efficiency in our operations. “

Under the agreement, Chase is responsible for underwriting and marketing the product, a small business term loan of up to 24 months that the bank has on its balance sheet. OnDeck provides loan technology and services.

Applicants apply online, get a decision almost immediately, and can receive their funds the same day. Loan repayments are automatically withdrawn from borrowers’ accounts. “It replaces a process that takes a lot longer and has always been branch-based,” said OnDeck CEO Noah Breslow.

Since pre-approval offers are only sent to existing Chase customers, the bank has access to a wide range of data that sheds light on candidate finances. The loans have annual percentage rates of 9% to 25%, which is higher than traditional small business bank loans, but lower than those offered by many online lenders.
Chase has not disclosed how much money he has loaned so far under the Quick Capital program, or the default rates on those loans. But Kimmerling said the lending volume is in line with the bank’s expectations and the lending performance has been very positive.

Chase said in a press release Monday that he intends to continue to refine the Quick Capital product and will expand access to loans in 2018.

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David A. Albanese