Why Amex buys Kabbage
American Express buys “almost all” of the online lender Kabbage, but not its loan portfolio. So what does it look like?
Technology and people.
American Express could use Kabbage’s software and talent to deliver a wide range of services to small businesses that would rival any bank, observers said.
“This makes sense for American Express as it allows them to bring in additional strong technology and related technology team at a good price instead of developing and recruiting organically,” said Sam Kilmer, senior manager of Cornerstone Advisors. “American Express is already one of the country’s leading small business lenders, allowing them to expand the use of this technology to a large customer and prospect base. ”
Amex has not said what it pays for Kabbage, although recent news reports indicated that the lender could be worth up to $ 1 billion following a $ 250 million investment by SoftBank.
The technology created by Kabbage is a lending platform that brings together data on small business borrowers, including bank account data, payment processing data, social data, shipping data, transaction data. credit card and accounting information.
“All of this data gives us a unique perspective on how well this company is performing,” said Kathryn Petralia, co-founder and president of Kabbage, in a previous interview. “This is what enables the user experience that we have today, which is a very fast onboarding process. ”
Automated loan decisions are often made within 10 minutes.
Kilmer said that the fact that Amex is acquiring the team and the technology and not the loan portfolio itself is a testament to the value of the technology itself.
“This is not about taking market share or a roll-up acquisition,” he said. “It’s about intellectual property, its time to market and its impact on capabilities.”
Indeed, in a research note to investors released Tuesday, Keefe, Bruyette & Woods analyst Sanjay Sakhrani said the deal would have little impact on Amex earnings in the near term.
Over the longer term, however, this could give Amex an edge over other lenders. The competitiveness of small business loans, just like consumer loans, requires the ability to make decisions instantly, Kilmer said.
“This is the area where credit card lenders like American Express and Capital One have tended to shine and where fintechs like OnDeck and Kabbage have shone,” he said. “Historically, credit card lenders have done particularly well with data analytics, while online lenders like Kabbage and OnDeck have excelled in user interface and user experience. That’s because credit card lenders need solid analytics to survive profits and regulatory scrutiny, while online lenders like Kabbage and OnDeck needed to shine on the user experience to bring customers and customers. investors to try them out.
Amex plans to use Kabbage’s technology to start making its own small business loans.
The card company already offers charge and credit cards and other short-term financing products for businesses, and with Kabbage’s technology, “we can better meet the needs of small businesses that may be feeling bad.” served by banks and who have limited knowledge of financial management tools that provide insight and insight into their spending and finances, ”the company said in a press release announcing the deal.
“American Express doesn’t really want the existing Kabbage business,” said Todd Baker, managing director of Broadmoor Consulting and a senior researcher at Columbia University. “He wants to be able to provide small business loans transparently, cheaply and efficiently. He wants the underwriting knowledge that exists in Kabbage’s algorithms and loan data. It’s basically about leaving the past behind and starting over with all the things that are really valuable. American Express and Kabbage told the Financial Times that they will establish and capitalize an entity that will manage all of Kabbage’s outstanding loans, and that borrowers will not be affected.
Kabbage’s online lending technology is “generally considered to be the best,” Baker said.
“We are excited about the Kabbage suite of products integrated into a single online platform that uses real-time data processing to help small businesses better understand, forecast and manage their cash flow,” said a door – Amex speech.
The Atlanta-based company, founded in 2008, has rolled out many innovations over the years.
For example, last September, the co-founders of Kabbage launched a new startup called Drum that helps small businesses connect with influencers and gig workers. American Express Ventures is one of its funders.
In October, Kabbage created a payment service, Kabbage Payments, which allows small businesses to create and send invoices to customers and create a URL through which they accept card payments through Kabbage for a fee of 2, 25% per transaction. Fifth Third Bancorp sponsors the service.
In February, Kabbage launched the ability to make short term loans to its customers who can be reimbursed in just three days. (Until then, it offered loan terms of six, 12, or 18 months.) This was a response to the fact that companies often repay loans early.
In July, she launched checking accounts with Green Dot Bank.
The Kabbage team has also set up a line of credit capability and a dashboard that small businesses can use to monitor their cash flow.
Kabbage’s co-founders, Petralia and Rob Frohwein, created an original and rambling startup that has grown rapidly. They have also been outspoken and passionate influencers, arguing for years that credit scores are an outdated form of credit rating and that other types of data, including cash flow, provide better insight. small business performance and value.
The two are expected to join Amex when the sale closes later this year. “Everyone at Kabbage will join Amex, including Rob and Kathryn,” said a spokesperson for Kabbage.
Baker said that often in cases like this, executives’ contracts are drafted in such a way that they only receive their full stock-related compensation if they stay with the company for a set amount of time.
Fitting a free-spirited startup into a large corporation with $ 198 billion in assets is bound to be a challenge.
At a large bank that Baker previously worked for, when smaller companies were acquired, “once they got into the mothership, innovation was usually crushed because it didn’t match what the bank was doing. . I called that destroy the village to save it. ”
At this time, however, Amex does not plan any major changes. “For now, the Kabbage brand and digital platform will continue to exist and be led and operated by Kabbage’s current management team, all of which are part of American Express Company,” the door said. -speak.
Hard times for online lenders
It is no coincidence that American Express announced its deal for Kabbage shortly after Enova announced that it had agreed to buy Kabbage’s main rival, OnDeck Capital, in July.
The two online lenders are, like others in space, disputed income.
The core business of Kabbage and OnDeck is to create and securitize small business loans. (In Kabbage’s case, the loans are issued by Celtic Bank in Salt Lake City.) When the pandemic hit, Kabbage was criticized. Many of her borrowers went bankrupt and she had to stop lending.
When the government rolled out the paycheck protection program, Kabbage rotated his platform to manage new Small Business Administration loans. It has made more than 300,000 small business loans totaling $ 7 billion, making it the country’s second-largest PPP lender in terms of volume of applications.
But the Kabbage loans granted before the crisis are difficult to value today, and therefore difficult to resell.
“While the performance has been surprisingly good on these small business loans, no one really knows if it’s just because of government assistance and if that government assistance stops, they will suddenly start to drop,” said Baker. “It’s very difficult for a buyer and a seller to agree on the value of these loans. Everyone in the small business space realizes that just being a lender is not viable, but if you can integrate various financial products into a business model, it delivers real value to clients. That’s why you see software providers, the Intuits of the world, getting into loans and payments.
Become a full-service bank for small businesses
Amex has spent years trying to build a small business capacity, Baker said.
“They were coerced because they were largely card-based, although they did make other types of installment loans and lines of credit,” he said. “They focused a lot on making the American Express card itself accepted by small businesses. It’s another way for them to offer more credit products and support small businesses.”
Frohwein, CEO of Kabbage, said he hoped to help achieve such a goal.
“We have built a technology and data platform that provides them with the kind of capabilities and information often reserved for large companies,” he said in Kabbage’s press release. “By joining American Express, we can help more small businesses succeed with a fully digital suite of financial products to help them manage and grow their businesses. “
Amazon, Square, PayPal, and Intuit are also developing a line of financial products for small businesses.
It’s likely there will be more deals like Enova-OnDeck and American Express-Kabbage, Baker said.
“The online market lending model just isn’t good,” Baker said. “No one was making money. But the technology and the ability to make that loan placed in another business model in other hands ”might work.