Fall is in full swing, and the holiday season is about to begin in earnest.
As we continue our series of news roundups for the merchant cash advance industry, there’s plenty to recap for the third quarter of 2023.
If you’d like to skim through the previous merchant cash advance trends and news that we put together, you can find them here:
This quarter, you’ll see updates on state-specific MCA regulation, what the CFPB thinks about AI underwriting, international MCA providers, and the latest U.S. labor market numbers.
Merchant cash advance is a growing industry, and these developments will have short and long-term implications for the future of your alternative lending business.
At Onyx IQ, we’re watching the most significant changes and sharing them with you so you can stay ahead of the pack.
1. The California Commercial Financing Headache Continues
The sun may never set on this piece of legislation.
California passed the commercial financing disclosure law in 2018, which included a clause that would repeal the annual percentage rate (APR) statute on January 1, 2024.
Implementing the law took so long that the sunset date was just months away. In response, the state legislature struck the sunset clause from the law in September of 2023, making the APR statute permanent.
Opinions on the efficacy of the disclosure law are mixed, but the fact is, it’s here to stay. Prudent MCA providers operating in California should review the law and ensure that they’re complying with it.
California is also teeing up another commercial financing bill prohibiting certain entities (particularly lenders and credit providers) from charging fees for things like ACH transfers, certain statements, and specific non-service fees. It also puts limits on fees for filing and terminating liens.
According to Senator Dave Min (D – Irvine), the bill “supports our small enterprises by eliminating unnecessary fees, capping fees that are unreasonably high, and providing more transparency in the lending process.”
2. New York’s Disclosure Law Now in Effect
After years of formal rulemaking, the Commercial Finance Disclosure Law (CFDL) from the state of New York is in full effect as of August 1, 2023. That means that if you provide commercial financing up to $2.5M, you must give standardized disclosures to borrowers when making an offer.
There are exemptions from this rule, including financial institutions and their majority-owned subsidiaries. You’re also exempt if you provide no more than five commercial financing transactions in a 12-month period.
This law applies to virtually all MCA providers operating in the state of New York. The civil penalties for violating the CFDL give it teeth, but providers can cure errors in their disclosures and avoid the fine.
3. Is AI the Future of Underwriting? The CFPB Has Some Thoughts
The power of AI to assist with tasks like underwriting is impressive.
While AI underwriting is already helping SME lenders gain a more comprehensive picture of an applicant’s viability for a loan, underwriting will always require a human touch to ensure compliance and an optimal user experience.
However, the CFPB is concerned that lenders and MCA providers using AI aren’t doing enough to help consumers understand why their loan request was denied.
CFPB Director Rohit Chopra succinctly said, “creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”
While some creditors use the checklist of reasons provided in CFPB literature, this approach doesn’t meet the Equal Credit Opportunity Act standard when notifying a consumer of an adverse decision.
The CFPB Circular 2023–03 could have a few implications for the merchant cash advance industry:
- Transparency and explanation requirement: MCA providers might need to review and possibly update their underwriting processes to ensure that they can provide clear explanations when denying advances, especially if they are utilizing AI or complex models.
- Technology and data management: MCA providers employing AI may need to dedicate time in understanding, managing, and explaining the data and algorithms driving their credit decisions.
- Alternative underwriting practices: By offering financing based on future sales rather than traditional credit scores, MCA providers might be able to demonstrate how their models could provide fair and transparent credit alternatives.
Again, this comes to prove that AI on its own just isn’t enough—there will always be the need for a human touch in every aspect of alternative lending and MCAs.
4. The International MCA Market Is Heating Up
SumUp Cash Advance, an MCA product offered by the international fintech SumUp, will now be backed by US$100M worth of credit provided by Victory Park Capital.
Victory Park Capital is pursuing a range of international investments in alternative financing. They recently provided a US $100M credit facility to Klar, a company providing alternative financing and credit solutions in Mexico.
These investments signal a number of merchant cash advance trends that providers in the U.S. should pay attention to:
- Global growth of the MCA industry: International growth of MCA products demonstrates a broader acceptance and demand for such financing solutions. MCAs are becoming more recognized and utilized, which should reinforce trends in the U.S. market.
- Increased competition: As international fintech companies like SumUp expand their MCA offerings, they could potentially compete in the U.S. market in the future. This would put pressure on U.S.-based MCA providers to innovate and improve customer satisfaction.
- Cross-border partnerships and investment: The significant investment by Victory Park Capital in SumUp showcases investor appetite for alternative lending and financing. This may attract more investments in the MCA sector, potentially from international investors or through cross-border partnerships.
In essence, the MCA industry isn’t only continuing to grow, but it’s also going global, which only comes to show the need that SMEs have for this type of financing.
Are international regulations on the horizon?
5. Labor Market Far Exceeds Expectations in September
Despite continued pressure from rising interest rates, the U.S. economy appears to be in excellent health, at least regarding employment.
After adding 336,000 jobs in September, the labor market is challenging the assertion that the Fed has put the lid on inflation.
Low unemployment numbers may provide a positive economic signal that small and medium-sized enterprises (SMEs) have been hoping for. This could boost demand for MCAs as these organizations seek to expand their operations.
Alternatively, SMEs may use MCAs to plug gaps in their cash flow if inflation stays high and suppresses consumer spending.
Interest rates could play a big part in demand for MCAs. Although Fed Chairman Jerome Powell recently stated that the Fed would hold rates steady in the near term, incoming data could alter that decision.
Higher interest rates can increase demand for MCAs as conventional loans get more expensive and credit tightens. It can also increase the cost of MCAs because providers have to adjust for their borrowing costs.
Onyx IQ: Navigate Change With Confidence
As a relatively young industry, the world of merchant cash advance and alternative lending is bound to see dramatic swings in regulation, investment, technology, and public sentiment.
If you’re a provider looking to navigate merchant cash advance trends, Onyx IQ is ready to support you with a platform that puts you way ahead of the competition.
Our technology won’t unwind MCA regulation or let you predict where the U.S. economy is going, but it will help you automate your processes and leverage data-driven models to improve your decisions.
Schedule a demo today and discover how Onyx IQ drives MCA’s future.