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How Banks View Competition in Small Business Lending

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Small businesses need access to credit in order to survive and thrive. For centuries, banks have been the primary source for small business funding. However, following the Great Recession, when banks turned off the spigot, and with the rise of non-bank lenders, traditional banks are facing increased competition in the business credit marketplace. While the largest banks are on solid footing, the number of mid-sized and community banks are declining.

Recently, the Federal Deposit Insurance Corporation (FDIC) conducted its Small Business Lending Survey (SBLS) in which 1,200 banks (more than one-sixth of all banks in the country) responded to questions about their small business lending practices.

The survey collected information on banks’ volume of commercial and industrial (C&I) lending. The data confirmed that small banks are more likely to rely on relationship lending practices, while large banks are more likely to use transactional methods.

However, all banks, regardless of size, reported that they are guided by a core set of practices centering on local personal interactions.

Underwriting Criteria

The majority of both small and large banks offer similar loan products, including lines of credit and term loans. Often, they use similar underwriting criteria. The FDIC survey found that small banks are more flexible in engaging with start-ups and evaluate a wide variety of additional criteria to qualify start-ups for loans, including evaluating owner characteristics, such as “education” and “experience in industry.”

Big banks have the perceived advantages in convenience, due to their extensive branch systems, and in pricing, particularly in their ability to offer lower interest rates. The majority of big banks require minimum loan amounts and are more than four times as likely as small banks to evaluate business credit scores in underwriting. They also are more than three times as likely as small banks to offer credit cards.

For banks with between $1 billion and $10 billion in assets, more than a fifth of their business loans above $1 million were made to companies with under $1 million in revenue.

Many Banks Still Have Not Gone Digital in Small Business Lending

The FDIC found that nearly every bank accepts applications at branches. However, despite the digital revolution in small business finance,  the study found that very few small or large banks accept small business loan applications online.

Banks typically view local banks of similar size as their primary competitors. Meanwhile, they view FinTech firms as emerging competitors, but not as top competitors currently.

Banks that do not allow for online small business loan applications are missing the boat. They are ignoring cultural trends. In particular, Millennials, who now comprise the largest segment of the U.S. population, want to do everything via their phones – including applying for business loans. In fact, at my company, more than 60 percent of loan applications are done via smart phones. This trend is not reversing anytime soon.

Online business loan applications are convenient and time-saving. Digitizing cuts labor costs, speeds the loan-making process, and fulfills the needs of target customers. Those banks that have not invested in digitizing on their own should look for FinTech partners who can provide the capabilities to enable online loan applications.

The European Business Review reported: “By tapping into expertise, traditional banks stand to move much more swiftly and effectively than they otherwise could to introduce new products, streamline processes, enhance customer experience, and increase revenues.” I agree.

Streamlining the process, making quicker decisions, and cutting costs to pass along savings to customers in the form of lower interest rates are all benefits of technology partnerships between banks and FinTech firms. Anticipate bank-FinTech partnerships to grow as we reach the half-way mark of 2019. The banks that fail to partner with FinTech companies and keep pace with changing times risk losing out on market share and becoming irrelevant.

 

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