In the SMB lending space, the entry of new players and the expansion of PayPal, Shopify, and Square into the merchant cash advance space will inevitably cause customer acquisition costs (CAC) to increase.
At least, that is inevitable for tried and true channels, such as CPC advertising.
CPC favors whichever company has the cheapest cost of capital and highest margins.
Publicly-listed online travel agencies have crushed hotels in online advertising and taken progressively bigger slices of each booking since 2008. Brick-and-mortar bookshops can’t compete with Amazon on Google Adwords.
In the US, the CPC for “business loan” is $50. Even if your site converts 10% of paid traffic — which is very optimistic — you are paying $500 for each conversion.
While CPC will go up as more venture-backed startups and deep-pocketed payment and POS incumbents enter the space, entry also means that the LTV on business loans will decrease.
Online loans are commoditized, so there is no guarantee of repeat business.
As more firms enter the market, lenders will need to provide better rates and terms to win business, compressing margins even more.
PayPal, Square, and Shopify have relatively differentiated and established core products they can use to distribute loan products. Pure SMB lenders have a tough road ahead.