Small businesses and their customers both have problems dealing with big businesses that are more vested in captive markets than in free ones. So, since VRM is about independence and engagement, we may have an opportunity for customers and small businesses to join in common cause.
To dig deeper into that possibility, I interviewed LaVonne Reimer, who runs Lumenous (a startup that provides ways for small businesses to create and share credit profiles on their own terms). Here goes—
DS: How big is small business?
LR: The domestic small business market in the U.S. is currently at 28 million firms. This includes employer and non-employer firms that provide products or services to their neighborhoods and communities as well as those that provide a unique offering to a larger supply chain or marketplace.
The impact of credit decisions is another big number—how at least $4 trillion flows to small business in the U.S.. That includes a significant portion of over $1 trillion in federal contracts and grants, and $700 billion in loans, a substantial portion of which are backed by the Small Business Administration (SBA).
DS: What’s the biggest issue for small business, and how is that similar to issues for individuals?
LR: Credit. The $28 billion credit industry provides creditworthiness indicators as well as personal identity and entity verification for both businesses and individuals. From the standpoint of both, that industry is a collection of black boxes. They are unaccountable collections of algorithms that can make or break a business, or often its owner, without explaining why. Or even knowing why.
The incumbent with the biggest impact on small business credit is Dun & Bradstreet. Founded in 1841, D&B is the grandfather of all credit bureaus and in many respects the originator of corporate surveillance. And now D&B is in the identity business as well, putting those being identified at D&B’s mercy.
LR: Through the Data Universal Numbering System, better known as DUNS. It’s a loss leader that gives D&B a potent tool for finding and extracting information from business owners not otherwise publicly available. And it’s all done out of the sight of the business, and—effectively—government as well.
DS: Are they alone at this?
LR: No. A handful of venture-backed “fintech” startups are using similar technology to harvest data. Some of the data gathering might be initially authorized by the business owner. Other data they can scrape or mine from the Web to determine creditworthiness for purposes of making loans. Many do not disclose “effective APR” but recent Federal Reserve System research suggests the range may be from over 50% at the low end to somewhere in the hundreds. Business owners may get loans they couldn’t get from regulated or traditional banks but are blind-sided by onerous terms and in some cases thrown into bankruptcy because the collection model—daily automated micro-payments—catches them off guard, for example by triggering excessive non-sufficient funds (NSF) fees. To a business owner, these providers seem much like credit bureaus. There is no way yet to leverage or re-use the data you have to supply to get the loan, much less understand how the algorithms work.
I should add that a small business “bill of rights” has been circulating among start-ups; but it under-estimates the degree to which the odds are stacked against a small business across commercial credit.”
DS: What about government oversight?
LR: Today, consumer identity and credit providers must comply with the Fair Credit Reporting Act, but the FCRA and similar regulations do not govern small business credit, not even when consumer credit information is used to verify the identity and creditworthiness of the entity and owner.
There is, however, increasing scrutiny by the Federal Trade Commission (FTC) of big data systems in credit profiling and other data brokers. In multiple enforcement orders and two major reports, the FTC is calling on identity and data providers to demonstrate greater transparency and accountability in the uses of personal data. One report is Big Data: A Tool for Inclusion or Exclusion? The other is “Data Brokers: A Call for Transparency and Accountability.
Still, as is true of the Fair Credit Reporting Act, small business is left unaddressed, even if creditors use consumer credit information associated with the owner of the business.
DS: What outcomes are we looking for here?
LR: At Lumenous, we are applying the principles of VRM to transform the relationship between small business and creditors. As a result, up to six million small employer firms will be able to access the credit, capital, and commerce they deserve.. This will lead to better leverage of cash and ability to not only meet payroll and pay bills on time, but also better contribute to the economic well-being of their communities. Twenty-two million “non employer firms”—freelancers and sole proprietors, for example—will have access to credit, and more easily form trusted joint ventures to bid on otherwise out-of-reach projects.
DS: Are there any large companies that are working to bring small business and their customers together in the fight to improve the economy from the bottom up?
LR: I really like what Xero is doing. It is far more friendly and useful to small business than other accounting software and services companies (especially Quickbooks). It’s growing rapidly too. I believe that;s because it has a deep understanding of how small business works, and a genuine respect for how small business owners think about their firms, and those firms’ roles in the world.
DS: I noticed. Xero’s CEO, Rod Drury, sourced a recent post of mine in a talk he gave just a few days ago. And Gary Turner, an old friend from my Cluetrain days, is Managing Director of Xero in the UK. I’ll be talking with both in the next few days as well.
LR: I expect that Xero will also have lots of useful intelligence about what’s actually happening with small business, worldwide—and with possible VRM connections.
And here are some bonus sources, mostly courtesy of LaVonne:
- Credit Bureaus Were the NSA of the 19th Century, by Sarah Jeong in The Atlantic. About “bureaucratic surveillance for the first time—one hundred years before the founding of the National Security Agency.”
- I Spent a Year Working for Merchant Services—Here’s How They Screwed Small Businesses, and Here’s How to Avoid It, by Jacob Weindling in Paste. Merchant services are what process your credit card payments at stores. As Weindling puts it, “the entire industry is rotten… Despite consistent growth for nearly a century, the economy does not work for a majority of us, and this is the source of Bernie Sanders and Donald Trump’s popularity. Lifetime politicians in the D.C. bubble never seriously pushed the two-tiered economic narrative because they were one of the chief beneficiaries of the upper tier. Bernie Sanders and Elizabeth Warren changed that, and as a consequence, Hillary Clinton has adopted much of their verbiage in order to stave off a revolt. The culture around the economy is rotten, and merchant services is emblematic of the virus at the heart of it. Merchants get screwed every day, paying rates they never were told about…”
- Not much help from government, either. Sample: Just a Little Minor Detail in Credit Card Reform Legislation – Small Business Still Screwed , by Robert Oak in The Economic Populist. It’s from 2009, but the screw is still in place.
- In How a Nonprofit Hopes to Eat Subprime Small Business Lenders’ Lunch, Patrick Clark (@pat_clark) explains how small businesses often have no choice but to pay exploitive rates to what are essentially legally protected loan sharks.
- Wage Inequality and Firm Growth (Holger. Mueller, Paige P. Ouimet, and Elena Simintzi, LIS Working Paper 632, March 2015) has been widely cited as a source on the subject of income inequality. (Sample: FiveThirtyEight.) Part of that inequality is the inability of small businesses not only to pay workers better wages, but also to participate in the economy’s overall growth.
There are many more, but I’ll save those for a follow-up post.