Two stories from very different contexts came across my news feed today. The first announced a major investment in a small business lending service. The other took a fresh look at the war on drugs and the origins of addiction.
Let’s begin with the piece I read first thing this morning. I have written earlier on the phenomenon of vertically integrated, big data-driven loan services. On Deck Capital may well have been the first. Many more have followed and today they account for well over $1B in venture capital financing. What’s not to like? Small businesses need more capital right? Why not create automated lending machines to get them funds a traditional bank cannot provide.
I watch these deals with interest. I understand why investors like them. Quite apart from the apparent value of increasing the flow of money to business owners, their reliance on emerging data science makes their intellectual property compelling.
But what nags at me is something my research has found over and over again. The more isolated a business owner, the more risky a bet. Couple capital with connection, and the odds of payback go up. This is the essence of relationship lending. Lenders know their borrowers and thus are able to provide counsel. Borrowers who come to know and trust their lenders, gain insights and support to grow. I have heard many a business owner cite their banker as their single most important partner.
Lending machines sacrifice connection in the service of efficiency.
I was pondering this when I saw the piece on drug addiction. I’d recommend reading it over relying on my summary but here’s what jumped out at me. Tests of how drugs lead to addiction often involve an rat isolated in a cage. Run similar tests on rats living in a community and they still experiment with drugged water as compared to pure water but the rates of addiction drop significantly. The author concludes that human connection, love if you will, is predictive of our ability to resist drug dependency.
Here’s an attempt to connect the two stories–a strange little juxtaposition. The credit industry’s variant on addiction would be easy money flowing to a high risk business or one that just isn’t creditworthy. My challenge to fintech start-ups offering algorithm-driven quickie loans is find a way to bring human connection into the mix.
Or, maybe the challenge should be to banks, especially those that already excel at relationship lending. Find a way to bring efficiency into your process but please do not lose the connection piece of what you deliver. A business owner in isolation will struggle to maintain positive habits such as timely repayment and financial sustainability.