Online Reviews Help Show Small Businesses the Money

Even online reviews can play roles in granting small businesses loans.

On Deck Capital, a technology platform that strives to get small businesses capital, began using such online data last fall to help do just that, Noah Breslow, COO, tells Bank Innovation.

“It’s still early days for us,” Breslow says.

To date, On Deck primarily uses social data for customer validation reasons. In other words, On Deck is finding “interesting ways” to indicate whether a small business actually has customers coming through its doors since it is not meeting business owners in person. By looking at social review sites like Google Places and Yelp, On Deck can help verify whether the business is actually in business, Breslow says. For example, if a company has had five reviews within the last week, it’s a good indication that the company is functioning.

By using such alternative data sources, On Deck hopes to be able to provide more capital to those small businesses in need of funding, which are many. Historically, granting small businesses capital has been an underserved area by traditional banks because the cost of underwriting and servicing the loans is not worth the return to them. Other companies like Capital Access Network Inc. and Kabbage are also striving to innovate the small business capital space.

Small businesses have received more than $200 million through the On Deck platform. On Deck partners with banks, leasing companies, funding advisors and other lenders to distribute loans to small businesses. On Deck has received its funding through VCs, including SAP Ventures, RRE Ventures, Village Ventures and First Round Capital. All On Deck loans are unsecured loans held by the company.

Though data gleaned from social media and online review sites has yet to play a prominent role in underwriting loans for On Deck, Breslow expects social data to become further apart of its model in the future.

The growing importance of digital data to On Deck is yet another example of how technology advances can innovate underwriting. Heck, even daily deals are helping On Deck get small businesses capital.

“Groupon is an interesting data source for us,” Breslow tells Bank Innovation. The daily deal model solves a business validation issue for On Deck while also providing the company further data on how many consumers are signing up for a merchant’s offer, he explains. Furthermore, when digital wallets mature in the United States and innovate the loyalty and daily deal scene, new data sources will emerge that may also benefit On Deck’s model. Indeed, digital wallets going mainstream will also create a data source on how many repeat customers a small business boasts, and Breslow says adding a loyalty source into its modeling is “promising.”

Naturally, when layering in new data sources, how accurate are the models is top of mind for financial services’ players. Though default rates aren’t “super public” for On Deck, Breslow says that On Deck’s loss rates are declining and are stable, and credits the improvements to a healing economy and its maturing model.

While On Deck works on growing out its small business loans, it’s also teaming up with banks and other enterprises to gain greater distribution channels. Last month, On Deck opened its API, for example, and within the next four weeks Breslow alerted Bank Innovation that it will be announcing a partnership with a major U.S. bank. Under the new partnership, banking customers who don’t qualify for a product will get a referral to On Deck.