Exclusive: ‘Striking the right notes’ – Kathryn Petralia, Kabbage in “The Paytech Magazine”
Online platform Kabbage was one of the first to use granular payments data to inform lending decisions, as Co-founder Kathryn Petralia explains
The ebb and flow of cash – payments in, payments out – is the beat to which every small business marches.
And understanding how fast or slow, large or small the sound those payments make, can help unlock working capital in ways not previously possible, using data analytics driven by artificial intelligence (AI). But banks have been hard of hearing, if not tone deaf to the opportunity, as Kathryn Petralia, co-founder of US platform Kabbage, which was among the first lenders to up the tempo, explains.
“A hundred years ago, when you knew your banker – and you probably went to high school together and lived in the same small town – it might’ve been a bit easier to get access to financial services,” says Petralia. “But the challenge now is that institutions – large ones in particular – are trained on larger businesses, because it’s really hard to verify small business data. Kabbage started by getting access to verified third-party data in real time and automated the process, which allowed us to serve small businesses cost-effectively.”
Kabbage uses machine learning to assess and then lend to SMEs. Its technology gathers information about small businesses – such as bank account, payment processing, social and shipping data – to make automated, fast loan decisions, sometimes in the space of 10 minutes.
Somewhat appropriately, its headquarters are in Atlanta, the city that 80 per cent of all electronic payment transactions in the US flow through.
FROM THE COAL FACE
Founded in 2008, the lendtech unicorn’s origins can be traced back to eBay.
“It was actually my co-founder Rob [Frohwein]’s idea to serve small businesses selling on eBay,” says Petralia. “EBay had launched an application programming interface (API) the previous year, that gave rise to the idea for Kabbage, so we got started by making loans to small businesses using the marketplace.
“We used that API to allow our customers to share transaction and seller-level data with us, so that we could verify that businesses were actually in business, what their transaction value was, and understand how to underwrite them. In about three minutes, they could come to Kabbage and get access to capital.”
As the API grew in popularity, so did Kabbage, because it was able to connect to more and more data sources that allowed it to deliver that same service to more small businesses in different industries. The company has since gone on to further develop its lending portal to unify online bill payment, credit lines and cash flow management tools, also creating Kabbage Payments, which lets small businesses generate and send invoices to customers ,and create a URL through which they accept card payments via Kabbage for a 2.25 per cent-per-transaction fee. Fifth Third Bancorp sponsors the service.
But the Kabbage ethos remains centred around helping small businesses get access to capital in a way that traditional lenders can’t.
“It costs banks the same amount of money to originate a $5million loan as it does a $50,000 loan, so they focus on the $5million loans because they can’t automate it,” says Petralia. “It requires people, paper and time.”
Kabbage’s lending platform and ability to automatically verify companies are who they say they are, led to it being one of the first fintech companies selected to issue loans through the US Small Business Administration’s Paycheck Protection Program (PPP) during the COVID-19 pandemic. Although a task it would surely rather not have had to undertake, it nevertheless helped drive business through the platform, which had itself been severely hit by the pandemic-induced recession.
“From our perspective, it was really easy to do, because we had already automated that identification process,” says Petralia. “It made it far less likely that those customers would perpetrate fraud.”
By August, Kabbage claimed to have processed $7billion in PPP loans, thereby providing support to more than 300,000 SMEs and helping safeguard an estimated 945,000 jobs on Main Street America.
It was around the same time that American Express (AmEx) announced it was to buy ‘substantially all’ of the online lender, including its proprietary data analytics and machine learning technology, along with taking on all of Kabbage’s employees. This will enable AmEx to expand beyond its commercial card products and begin making its own loans to small businesses at a time when many of them are still suffering the effects of the global pandemic.
Speaking at the time of the acquisition was announced, Anna Marrs, president of global commercial services at AmEx, said: “The acquisition accelerates our plans to offer US small businesses an easy and efficient way to manage their payments and cash flow in one place, which is more critical than ever in today’s environment.
“By bringing together Kabbage’s innovative technology and talented team with our broad distribution capabilities and over 60 years of experience in backing small businesses, we can better help our customers to successfully emerge from this challenging period and beyond.”
Kabbage has rolled out a number of innovations over the last year or so – the most recent, in September 2020, being business current account. But in 2019, it launched startup Drum – which was backed by American Express Ventures, among others – and connects SMEs with gig workers and influencers. Shortly afterwards, it created Kabbage Payments, which lets firms create and send invoices to clients and customers. Partnering with Fifth Thirds Bancorp for its payments product, the company also enables users to send a custom pay link, with a unique URL, through which they can accept card payments.
Earlier this year, the company debuted its short-term loan product that enabled Kabbage Payments customers to repay in as little as three days – instead of its previous six, 12 or 18-month terms.
Kabbage described the integration of the last two services – lending and payments – as the first of ‘many new solutions’ designed to increase its offering to help small businesses efficiently analyse and manage their cash flow.
Expanding its services beyond loans and into financial management was something of a natural move for the company.
“A couple of years ago, we realised that we were in a relationship with our customers,” Petralia explains. “Customers were borrowing from us 15, 20 times during their lifespan. So we thought, one of the biggest problems our customers have is cash flow. For a small business, it means ‘do I have the money I need next week, and next month, to do the stuff I need to do?’.”
Kabbage realised that it had, in fact, been predicting cash flow for its clients for years – with its models showing how likely it was that individual customers were going to have sufficient revenue to satisfy the obligations the lender was giving them access to.
“So we turned that into a cash flow management suite, which includes things like payment processing, bill paying and invoicing, and checking accounts,” Petralia says. Kabbage’s checking accounts were launched in September. Data from these accounts also helps Kabbage understand how a business might be performing.
“It sounds counterintuitive because, theoretically – and we hope – they will borrow less,” says Petralia, “but it also means they will borrow more precisely, and spend less on fees. That is our goal for customers. And we believe they’ll stay with us for the long term if we help them to do that, hence the suite of cash management] products.”
Looking to the long term is vital for Kabbage. In March, it furloughed a significant portion of its team and shut down its SME credit lines a month later, before slowly switching its services back on when it became a PPP lender. However, the government-backed scheme is only temporary and it is worth noting that the AmEx acquisition did not include Kabbage’s extensive loan book – covering previous loans, which are now difficult to value, and those made under PPP. Since October 16, these have been managed through its new K Servicing site.
But, on a positive note, by consolidating its services with payments giant AmEx, Kabbage can now orchestrate a much bigger piece of work on behalf of the country’s SMEs – and that must be music to their ears.