By Pete Rizzo (@pete_rizzo_)
The U.S. Small Business Administration has estimated that lenders issued $587 billion in loans to small businesses (SMBs) in 2012, but despite the size of this sum, evidence persists that the Great Recession still looms large over consumer lending.
U.S. SMB lending was down nearly 18 percent from levels observed in 2008, due in part to lingering ramifications of the financial collapse. Many current and former small business owners have been left with damaged credit scores, while lenders have faced doubts about even long-trusted lending indicators.
On a global scale, John Aglialoro, vice president of commercial innovative solutions at MasterCard, estimates lenders are losing more than $2.5 trillion annually in missed opportunities in the global SMB market. Aglialoro calls this loss the “thin-file problem,” where lenders lack access to sufficient indicators and solutions to inform potentially lucrative lending decisions.
But, it can be said that out of great problems come great solutions.
Announced on September 16, MasterCard and alternative-credit solutions provider Entrepreneurial Finance Lab (EFL) have teamed to help issuers recover this business so that, in turn, global SMBs can gain better access to capital.
“I think the challenge to the financial payments industry is to be able to work with partners like EFL in order to provide small business with more access to capital and give the banks and issuers the information they need to choose the right prospects,” Aglialoro told PYMNTS.com.
How exactly do the new partners plan to tackle this $2.5 trillion problem? For this answer, PYMNTS.com went straight to the source, sitting down with MasterCard’s Aglialoro, and EFL’s co-founder and COO DJ DiDonna to learn more.
How Does EFL’s Solution Work?
DiDonna began the interview by introducing EFL, and telling the story of how the innovative lending startup grew out of Harvard University. It’s original goal, according to the COO, was to figure out how it could learn about entrepreneurs: especially those in information-scarce environments.
EFL calls its solution a psychometric scoring model. To build the tool, DiDonna said EFL borrowed from a host of unconventional sources, including industrial psychology, entrepreneurship best practices and personality indicators to rethink the question of what makes a good repayment risk for SMB lenders.
EFL asks SMBs to complete a 30- to 45-minute test that assesses their optimism, drive, motivation, business skills, fluid intelligence and personality. Through its partnership with MasterCard, it’s this resource that will find its way to issuers in developing markets.
“In the past three years, we’ve had over 64,000 applications go through,” DiDonna said in an interview (Jump to 3:48). “That amounts to almost $200 million in financing that would not have had a chance to be dispersed.”
Who Can Benefit From the Tool?
DiDonna went on discuss the specific types of small business owners that will benefit most from its partnership with MasterCard. The COO indicated that women and young entrepreneurs are the most likely to gain new access to lending, because EFL’s model allows them to bypass formerly extensive pre-qualifications.
“It’s exciting because the amount of borrowers that the banks actually have which are women [is] quite small, and for them to actually get some confidence that women are as good if not better at repayment opportunities as men can really open up that segment” DiDonna said (Jump to 4:05).
But, DiDonna was quick to stress that research has found that its tool predicts aspiring small business owners just as well.
How Does The Partnership Increase MasterCard’s Credit Opportunities?
For MasterCard, Aglialoro said, the partnership is all about leveraging EFL’s solution and extending it to the SMB credit space.
“Our goal is to take this proven model for [EFL’s] term-loan business and extend it to support our small business banks [so they can] issue small business credit cards to very similar kinds of small business prospects,” Aglialoro told PYMNTS.com (Jump to 6:30).
Aglialoro indicated banks can use EFL to set minimum lending criteria and offer more appropriate products. In turn, this will allow it to support SMBs and drive economic growth in developing areas.
For more on what innovations you can expect out of MasterCard’s partnership with EFL going forward, listen to our full interview with DiDonna and Aglialoro here.
*If you have trouble with the audio player above, click here.
Dennis (DJ) DiDonna, Co-Founder and Chief Operating Officer, EFL Global
Dennis (DJ) DiDonna is Co-Founder and Chief Operating Officer of EFL. He is an experienced technology entrepreneur with a sales, management, and operations background. DJ joined the Entrepreneurial Finance Lab to help commercialize their research conducted in the Harvard Kennedy School’s Center for International Development. DiDonna has worked in microfinance and development in both Africa and Latin America and has helped scale EFL’s operations across 20 countries and 4 continents. He received his B.A. in International Relations from the University of Notre Dame and an MBA from Harvard Business School.
John Aglialoro is Vice President of Commercial Innovative Solutions in Global Products & Services at MasterCard Worldwide
In this role, he is responsible for developing new partnerships and products focused on meeting the emerging needs of small, medium and large corporate commercial customers. In his role he works with external and internal stakeholders to bring innovative product solutions to MasterCard commercial issuers to differentiate the MasterCard brand in the marketplace. Prior to joining MasterCard, John held several commercial payments roles of increasing responsibility at American Express from 1999 to 2011. His experience in this segment includes small business acquisition, partnerships management, middle market strategy and customer loyalty. Prior to that, John started his career at General Motors where he held several finance roles in corporate finance and analysis. He holds an M.B.A. and B.S. from the Stern School of Business at New York University with concentrations in Marketing, Finance and International Business.
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