Equifax (NYSE: EFX) has introduced a new tool that promises to shake up small business lending in the United States, but it comes with both opportunities and challenges for alternative lenders.
On September 18, 2024, the company introduced its new Merchant Data Network, a cloud-based platform designed to provide lenders with enhanced visibility into the financial profiles of U.S. small businesses.
Key Features of the Merchant Data Network:
- Combines Equifax's Commercial Financial Network data with aggregated credit card transaction data from leading providers like Fiserv
- Covers 5.5 million businesses and over 50 billion annual transactions
- Offers up to 60 months of aggregate transaction history
- Aims to improve traditional commercial scoring by more than 8%
- Sales insights and revenue data, especially for businesses with limited traditional credit information.
- Merchant income verification data.
- Business firmographics and credit history data, which can be used alongside the transaction data.
Valuable Insights for Lenders from Equifax’s New Merchant Data Network
Sales insights
The network provides critical sales data for businesses, especially those with limited traditional credit information.
Revenue trends
Lenders can access up to 60 months of aggregate credit card transaction history, allowing them to analyze revenue patterns and trends over time.
Business verification
The data helps verify a business's existence and operations, simplifying and shortening the underwriting process.
Improved risk assessment
The network enables lenders to identify leading indicators of business fraud and potential failures.
Business sustainability
Lenders can gain greater confidence in assessing a business's sustainability and overall commercial risk.
Enhanced scoring
The Merchant Data Network can improve traditional commercial scoring by more than 8%, particularly for merchants with no trade history or only firmographic data.
Cash flow analysis
By providing aggregated credit card transaction data, lenders can better understand a business's true revenue and cash flow.
Seasonal patterns
The extended transaction history allows lenders to analyze seasonal business trends and adjust their assessments accordingly.
Merchant income verification
The network helps verify merchant income, establishing a business's ability to repay loans.
This comprehensive dataset aims to provide a more complete financial picture of small businesses to help lenders make faster and more informed lending decisions. The network combines traditional commercial data with actual transaction data to improve visibility into small business finances and creditworthiness.
Our Opinion
The Merchant Data Network covers a lot of ground, but it has some limitations. It mainly uses credit card transaction data, which might miss cash-only businesses or B2B companies that use other payment methods. Pricing details aren't public yet, but experts think it might be expensive. Lenders need to weigh the costs against the benefits, like better risk assessment versus higher operational costs.
There are also some concerns and limitations to keep in mind:
- Data privacy and security could be an issue due to the large amount of transaction data collected.
- The system might not work well for new businesses or those with little online presence.
- Lenders will need to spend time and money to fit this new data into their current processes.
- Relying on third-party data providers could lead to problems with data accuracy and timeliness.
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