Captive Origination provides Real Advantages to Networks

If you look at vendors selling transactional finance, the ones that have the best chance of success are those that have a captive network - Amazon Business, Basware, Coupa, Nipendo, Tungsten Networks, etc.

These networks have done the hard part – provided some payable integration or marketplace service and have captive audience for origination of transactional finance.  Businesses that will win in this turf war are the one that can sign captive origination most effectively.

Why? Origination is hugely expensive.  Customer acquisition costs are a huge expense for any lender – alternative business finance, conventional,  or specialty finance.  Banks have the customer relationships, simply because businesses need a checking account.  Just ask any Colorado businesses trying to sell legal pot how hard it is to do business without one.

My conversations with some of the altfin b2b lenders indicates that acquiring customers costs at least $2 to $3K,  and those costs are rising.  You need a high lifetime value to pay back that cost.   Many are using the following methods, and throwing money at social media like FaceBook and Linkedin where you can go down a dark hole.

  • Paid Search
  • Online Paid – FB & Linkedin
  • Outbound Sales
  • Direct Mail

More and more millennials will emerge as entrepreneurs with deep attachments to social media, and the new specialty finance technology providers must leverage these changes by embracing new algorithms for lending.

Some of the altfin lenders have started partnering with banks so they can get access to their customer relationships.  JPMorgan and OnDeck Capital are the prime example but there are others, including regional banks like Regions and Fundation.  If alternative business finance can form a relationship with a Bank – they have another source of low cost origination.  Think of the small business that can’t secure a credit or factoring line– and this cuts their origination costs.

As new competitors enter the altfin b2b lending space, those with a captive audience have the advantage.  The new entrants without a network will see increased marketing costs. This is already common now with consumer lending models.

The challenge the networks that have a captive audience have is many times they do not understand how various network members finance their receivables.  So just having a “Get Finance Now” button doesn’t always cut it, as those receivables may be part of some factoring, bank or even securitization finance solution.  Gaining this understanding is not easy, and is the reason many p2p solution providers have struggled around transactional finance.

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