One of the biggest issues holding back the SME online lending sector is the lack of transparency. When evaluating the myriad of alternative financing arrangements now on offer, SMEs find it challenging to readily and accurately answer three basic questions:
- Is this the right product for my needs?
- How much is it going to cost?
- Can I get a better deal elsewhere?
A new US initiative could solve this transparency problem. America’s three largest SME online lenders, On Deck, Kabbage and CAN Capital, and industry body the Innovative Lending Platform Association have joined forces with other fintechs to create a pricing disclosure model that will enable SMEs to more fully understand and assess alternative finance options.
The SMART in SMART Box stands for “Straightforward Metrics Around Rate and Total cost”. It is a comparison tool designed to foster common terminology and enhanced disclosure standards around a comprehensive set of pricing metrics. It presents key pricing information in a uniform fashion and helps to flag, in plain English, certain product features or policies. It will help SMEs make more informed decisions about the total cost of borrowing, as well as enable apples-with-apples comparisons between alternative providers.
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There are currently three different versions of the SMART Box disclosure – for term loans, lines of credit, and merchant cash advances — that take into account the differences between products, while still utilising common pricing metrics and calculations and standardised language.
The SMART Box disclosure has two main parts. The first part presents basic elements of the finance option under consideration, including the amount financed, the funds disbursed, the total repayment amount, the expected term, and the frequency of payback.
The second part of the SMART Box presents four common pricing metrics: total cost of capital, Annualised Percentage Rate (APR), the average monthly payback, and the cents in the dollar cost of the financing option.
The SMART Box model disclosure will be made available to online lenders through a license arrangement. All lenders will be required to sign an attestation form confirming their adherence with SMART Box principles and requirements, including the requirement have a third-party validate the methodology the provider uses to calculate certain pricing metrics such as its APR. This should ensure that the tool generates accurate and consistent data that borrowers can rely upon. Borrowers will be able to see for themselves exactly what a loan will cost them and they will be able to make like-for-like comparisons.
Could it work in Australia?
There has been considerable discussion within the Australian fintech community about the need for pricing transparency. Several fintech lenders have been outspoken on this subject and most websites have their own pricing tools some of which enable comparisons with other lenders. Unfortunately, this diverse group of participants is yet to agree on a consistent and standardised approach.
SMART Box represents a ready-made opportunity for the Australian online SME lenders to take that all important step forward. Given that both On Deck and Kabbage operate in Australia it would make sense for the local subsidiaries of these major global players to take the initiative in conjunction with Fintech Australia, the closest equivalent body to the Innovative Lending Platform Association.
How and when Australia’s SME online lending sector addresses this challenge will have a significant bearing on both its reputation and growth prospects.
This is how the Smart Box tool would report on a Term Loan