Federal Reserve researchers gauge small business owners’ understanding of online alternative lenders and their products

Federal Reserve researchers gauge small business owners' understanding of online alternative lenders and their products

The online alternative lending industry holds promise for expanding access to credit for small businesses. But it also poses potential risks, as the small-dollar credit products offered by alternative lenders can be considerably more expensive than traditional credit. To gauge small-business owners’ perceptions and understanding of online alternative lenders and their product offerings, two Federal Reserve researchers conducted online focus groups with 44 “mom and pop” businesses in a wide range of industries and from across the United States.

While the focus group participants demonstrated an openness to online alternative lenders, their responses suggest some areas of concern, say researchers Barbara J. Lipman, a project manager at the Federal Reserve Board of Governors, and Ann Marie Wiersch, a senior policy analyst at the Federal Reserve Bank of Cleveland. In a report detailing their findings, Lipman and Wiersch note that:

• When asked for their initial top-of-mind impressions of online lenders, a majority of the focus group participants relayed negative to neutral reactions. After participants visited actual lender websites, their attitudes shifted positively. However, the lenders’ collection of businesses’ financial information raised concerns about data security and privacy.
• Using information typically provided on online alternative lenders’ websites, small businesses find it difficult to compare credit products, particularly on cost.
• Virtually all of the focus group participants said they want clearly stated product features and costs and an easier way to compare product offerings. Among their suggestions were interest rates expressed as APRs, straightforward explanation of all fees, and required statements about payment policies, including late fees and prepayment penalties.

For more information, see Alternative Lending through the Eyes of “Mom & Pop” Small-Business Owners: Findings from Online Focus Groups.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892