CEO Corbett: “One of the reasons behind the opportunity to move into small business lending is the major banks pulling back.”
Empty seaports and other haunting synecdoches (downward-sloping GDP charts, and so on) suggest the specter of trade wars are beginning to batter American commerce. How does this affect the lenders underwriting and bolstering trade?
According to Aidan Corbett, CEO of Ireland-based capital platform Wayflyer, most e-commerce companies saw the writing on the wall during the first tariff-happy Trump administration. Having diversified the markets in which they operate, e-commerce players are more hampered by downticks in consumer sentiment and spending than they are affected by protectionism per se.
In the midst of this volatility, Wayflyer announced yesterday that it’s deployed more than $5 billion to over 5,000 small businesses worldwide. In a conversation covering growth and diversification strategies, bear-market implications, and the unique needs of embedded lending, Corbett tells Fintech Nexus about debt-related opportunities in the coming years — partially caused by the retreat of bracket bulge banks from SMB lending.
The following has been edited for length and clarity.
You’re currently moving beyond e-commerce into new verticals. What’s the logic behind that expansion?
I think one of the reasons behind the opportunity to move into small business lending is the major banks pulling back. That’s something that we didn’t actually see coming as aggressively as it happened, both in the US and the UK. When we launched Wayflyer back in 2020 our view was, We’re staying in e-commerce, we’re building connectors to datasets like Shopify [NSDQ: SHOP] and Facebook [NSDQ: META] so we can pull in vertical-specific data that a bank is never going to do. Now, what you’re seeing across the board is that banks are actually not that interested in lending to small businesses at all compared to what they would have done historically. That’s for a number of different reasons. Some of them are regulatory, whereby they’re looking to see if they can actually lend to less risky assets, or what the regulators perceive to be less risky assets, and some of it is just more general: Is it actually worth the hassle for them to go and lend to small businesses?
So one interesting data point would be Chase [NYSE: JPM]. I think in Q1 last year, they originated about $1.2 billion in small business loans. Square did about $1.3 billion, Wayflyer about $400 million. I don’t think we should be within two orders of magnitude of Chase, but that’s the nature of what’s happening in small business lending. Now you have companies like ourselves and Square attacking very specific verticals, and suddenly the volumes are actually beginning to appear on par with some of the larger banks. And I think JPMorgan Chase is probably a lot bigger than Wells Fargo [NYSE: WFC] or Bank of America [NYSE: BAC] or Citi [NYSE: C]. The whole way in which small businesses are actually being funded is going to have to change, because the larger banks are not really interested until a company needs $20 million plus.
You work with JPMorgan, is that correct?
Well, they fund us. The interesting thing is, of the $400 million we deploy, they probably gave us over half that. It’s easier for them to give us lots of money, and we deploy it, and they submit their return, rather than pursuing those companies individually.
Are they doing that in different spaces too? Because obviously e-commerce isn’t the full “small business” umbrella.
They’ll do it in other places as well. And all of the banks will. If you think about our business model, if I were to advance you $100,000 tomorrow for your e-commerce business, it would be one of the bulge bracket banks in their structured finance function that will give us between 80 and 85 percent of the money. We will have a mezzanine structure that will take on the next 10 to 15 percent, and then Wayflyer or a Wayflyer equivalent will commit between five and 10 percent. So you will always have a structured finance bank contributing the majority of your money today in the form of a warehouse or in the form of a securitization that they would structure. The mezzanine funding typically comes from smaller credit funds that require a higher rate of return, and they’re taking more risk as a result.
How are you reacting to that market gap, or that retreat by banks, from small business?
So we started off in e-commerce, and if you look at our business today, we’ve also now expanded into wholesale. So if you’re selling physical goods into Walmart, Kroger, Target, we’ll also finance those businesses, and that’s probably 10% of our book, up from 0% about a year and a half ago, and it’s growing faster than our current book. So we’ll look to add additional verticals over time, but we’re going to go vertical by vertical, because we think there’s a huge advantage in having a specific team focus on a specific vertical, because you understand the nuances, and you understand the type of product that will suit them.
So for example, our merchant cash advance product that’s very suited for e-commerce would not be suited for a restaurant or a barber shop. They would need a totally different structure, a totally different quantum of money, a different repayment frequency. So you have to tailor the product to the vertical, and when you do that, then you’re much more likely to serve the customer with a better offer and to deploy more as well.
Are you seeing macroeconomically induced demand for different kinds of loans?
To be honest, it’s not macro-induced. It’s more that when you want to launch a new lending product, it actually takes more time than you would think. Number one, you need to align with regulation across 50 states, and then number two, you need to work with banking providers or banking funders to show them how it’s different from the old products, and how the underwriting and credit changes. We always knew we wanted to launch these new additional products.
I’ll give you an example: Merchant cash advance works extremely well for companies that are very seasonal, because you will take a percentage of daily sales, and because their business is seasonal, repayments look very different based on what week of the year it is. So it perfectly aligns for seasonal business. A business that’s not seasonal, for example, somebody that sells baby products online: A fixed loan works much better because they know exactly how much money you’re taking out every day and every week, and the cash flow doesn’t fluctuate as much week to week. So that’ll be an example of where we knew a fixed loan product would be better, and we just needed to go through all the steps to actually get there.
So what was the advantage to starting with the “take a cut of a sale” model?
There are a couple of advantages. Number one, it was really well understood in the industry. Two competitors, Shopify Capital and Clearco at the time, had already launched this product, so it was well understood by the market. And the second is, it’s less regulated: Merchant cash advances are not regulated as loans. It’s much easier to expand quickly with that product.
Is there any interest in pursuing something like an embedded route as a way to boost volumes through these pipes that you’ve built?
Yes. We’ve spent a lot of time looking at embedded. We’re probably going to be announcing one or two embedded partnerships later in the year. Embedded for us is definitely a channel that we want to grow, because it will just allow us access to customers that we won’t get access to primarily in our current channels, and it allows us to tap into very large pools of merchants. So it can work really well.
There’s a couple of challenges with embedded. So the first challenge with embedded is that your partner needs to understand that the relationship with a customer when you lend to them is very different than when you’re selling a SaaS product, and the main difference is, as a lender, you are casting judgment on a founder every three to six months. And as a founder, I can tell you, I do not like when somebody casts judgment on me, and if I don’t like the answer, that totally changes the nature of the relationship.
The second thing with embedded — and it’s really important, it’s why I think B2B BNPL has struggled — is that you can’t relax the quality of the underwriting too much. So one of the advantages with embedded from the consumer’s perspective is there’s less friction, but a lot of the time, you remove a lot of friction to increase your conversion rate, but you’re not collecting enough data to be as accurate as if they went to your site directly. So you need to find that sweet spot where it’s still minimal friction, but you’re gathering enough information and enough data to make sure that the underwriting is still really robust.
That seems pretty unique compared to something like embedded payments or embedded banking.
Embedded payments, embedded insurance, you don’t have the judgment casting that you have with lending, so it’s very different. And I think those products lend themselves better to a pure white label, whereas I think with lending, it often works better where the partner can kind of say, Well, Wayflyer rejected you, I didn’t. As a founder, your whole reputation, whether you like it or not, is wrapped into your company. And when somebody tells you, Hey, we don’t think you’re good enough, you take it very personally. We deal with that every day of the week. A SaaS company or marketplace doesn’t.
We recommend that we partner with customers. So they make it clear that Wayflyer is the underwriter and the provider, and when they do it in that way, then they look absolutely benevolent. We are offering this funding for you. This is something that will help you scale. But when the message is actually, We’re not ready for you right now, or, We don’t think you qualify for as much as you think you do, Wayflyer has to handle that, and the partner’s brand is protected. And most partners on embedded will want that. The only ones that are fine eating it are the major brands like eBay and PayPal.
There are some communities that are very easy to access. So Shopify sellers are a community that are very easy to access. They use a lot of partners. They’re very open about their business. A community that’s harder to access, as an example, are Amazon sellers, because they’re not necessarily trying to build their own branded product. They may be reselling other products, or they may be more generic products.
And then the second thing is communities that have a much smaller size, so with the average seller being very small, you’re much better off using embedded for that, because it’s not worth your while pursuing individually somebody who’s doing $50,000 a year in sales.
What sources did you consult to chart out your embedded strategy?
There are lots of potential embedded partners, particularly in e-commerce, and we speak to those partners all the time, and then work through with them how we think it should work. A lot of these partners have taken on an embedded solution that has half worked. It’s been on a bit of a learning curve over the last three to four years. So for example, one of the things that a lot of partners look for is a target and a guaranteed acceptance rate. So they would say to you, You have to accept 80% of the applicants that come through. And for you to do that, what you actually need to do is you’ll shrink the applicants that you will put deals in front of. So what that actually resulted in was very, very few people getting funding because the lenders were so conscious of hitting that 80% target, they just reduced their credit box accordingly. So there’s been a lot of learning on both sides, but for us to learn about that, it’s very much been in the market.
Do you have any sort of stipulations imposed on you by banks providing the credit?
They will typically assess our underwriting, and they’ll review our underwriting, but our underwriting process, whether it’s embedded or not, uses a lot of the same technology, it uses the same API calls, so it’s very similar. So because it’s the same underwriting, it’s not a major issue for our banks. The issues for banks are typically if you dramatically change your underwriting process, if you launch a totally different product, or you go into a dramatically new vertical.
Do you intend to use embedded to pursue other verticals more quickly? I’m thinking back to that branding question — being able to reach gyms through Mindbody, for instance, rather than directly.
There are certain verticals that are very suitable for embedded and they’re typically verticals where you have a lot of small operators with a point-of-sale system. So that can be gyms, that can be barber shops, that can be restaurants, that can be coffee shops, that can be hospitality.
I will say right now our business is probably 85% direct, so we can make direct work, but embedded helps access specific pools of customers, potential customers where direct outbound or marketing finds it harder. The one thing to bear in mind with embedded as well is that it’s still in a nascent phase. There’s still a lot to learn on both sides. a16z wrote an article a few years ago, “Every Company Will Be A Fintech Company.” It’s not that easy for the reasons we spoke about earlier. And I think for a while, everybody wants to be a lender. I think now people realize actually they want to offer the service, but there’s more complexity to it. If I get it wrong, it can really hurt my brand. So there’s definitely a lot of lessons from the last four years, but I think it’s going to take off enormously over the next five to 10 years through the right lending partners.
Like, What’s your target acceptance rate? Who provides the support? How much support is provided? All of those things that feel like small things to iron out actually can make or break the program entirely.
To return to macroeconomics: Have you seen any changes to the kinds of loans that businesses are applying for?
The one thing to bear in mind is, the vast majority of e-commerce companies saw this coming. And the reason is actually because, in Trump’s first term, he imposed a 10% tariff on China, and at the beginning of his second term he imposed another tariff on China. So at this stage, if you are still entirely exposed to China as your supplier location, it’s probably because you’re in a vertical where it’s very hard to find another supplier. And two example verticals of that are electronics and toys. So there are just certain verticals where you just don’t have the alternative sources easily available in Mexico, in Vietnam, in Cambodia, whereas, for example, with apparel, it’s actually very easy to move from one supplier location to another.
And because most of our customers don’t require custom tooling, they can probably switch locations within 25 to 45 days. So a lot of e-commerce businesses are more robust and more resilient than you would think, because on the supplier side, and as a consequence, how they’re performing, it actually hasn’t hurt us that much.
What’s more in the focus for us right now is companies maybe pausing on the amount of money that they’re going to draw down. They’re more worried probably about the impact on consumer demand. The thing that we’re looking at is the amount of money that we deploy. What has helped companies like us is that this is happening in April and not happening in August or September, because that’s when all the major orders are made before Black Friday and the Christmas period. If it had happened later in the year, it would actually put a lot more stress on e-commerce companies.
