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PCBB Banc Investment Daily October 31, 2014
Banc Investment Daily
October 31, 2014

The Spooky Truth About Unregulated Business

Taxi drivers the world over are preparing for the zombie apocalypse. There have been sizeable demonstrations in numerous cities as drivers do not think they are being adequately protected by their municipal governments from invading hoards of flesh-eating beings. We are not talking about real zombies, those walking corpses found in legends and Night of the Living Dead movies. We are talking about unregulated app-driven rideshare services which are becoming increasingly popular. The primary providers are Uber and its competitor Lyft, with its big furry pink moustaches. It is a classic struggle between a longstanding regulatory tradition and technological disruption.
Here's how it works: perspective riders register and have an app on their smartphone which allows them to request a ride using the GPS locator on their phone. Credit card information is taken at registration, the price is determined ahead of time by the company and no gratuity is expected. It sounds like a pretty sweet deal except that while drivers are screened by their employers, they are generally not licensed cabbies.
There are many similarities to the non-bank entities in the banking business, in both the payment and lending space. Non-bank consumer lenders such as payday and auto title loan companies are often of questionable quality. Of even more concern is the small business arena. Startups or smaller businesses may end up working with internet-based lenders, which claim advanced analytics for evaluating cash flow and collateral allows them to take on riskier loans. But many of these lenders follow the same path as the payday companies with short term installment loans designed from inception to go delinquent and capture fees. Payday loans are at least coming under scrutiny from the CFPB, but business loans pretty much remain untouched. Remember that usury laws don't apply to business loans.
The SBA's blog site discusses non-bank lenders and some points borrowers should consider before using one. The SBA warns that non-bank lenders charge higher rates and have different loan conditions than traditional lenders. The SBA also warns that non-banks are not subject to the same regulatory requirements so borrowers may be subject to different disbursement timelines and loan terms. Finally, non-bank business lenders are likely less well-known, so borrowers should do careful research, as recourse when something goes wrong may be difficult or impossible to obtain.
Banks should recommend that customers tread carefully before walking down the path of unregulated financial service providers. Customers most often end up paying higher fees and interest by doing business outside the regulated space designed to protect them. Banks have to adapt to customer needs too. If customers expect shorter approval times and online loan applications and other conveniences that come naturally to internet-based company enterprises, banks need to provide them.
DeSoto Cabs in San Francisco is addressing the rideshare issue by offering a smartphone app to summon a cab in the city. Taxi companies, like banks, need to adapt or they will become quaint anachronisms. We welcome the taxi app as we have spent some desperate times trying to find a taxi, particularly in San Francisco. In the end, just like we wouldn't want to trust our money to an institution without regulations or insurance, we don't really want to ride with drivers who don't hold a commercial driver's license and may not be adequately insured, even if it costs a little more. Your banking customers should consider the same when choosing a financial service provider.