As small businesses exhaust their PPP funds and strive to return to normalcy, many are now seeking loans for both working capital and to invest in new opportunities. It’s no surprise more of these businesses are starting their searches online. According to the JPMorgan Chase Business Leaders Outlook survey, 56% of small businesses said they would be open to procuring an online loan if they find themselves in need of capital. That would seem to give the edge to fintech lenders.
Or maybe not. According to the Federal Reserve, small businesses indicate high satisfaction with community bank and credit union lenders. Nearly 90% of small businesses that applied for a loan with a credit union in 2020 said they were satisfied, according to the Fed’s Small Business Credit Survey. 81% said they were happy with their bank lenders compared to 68% for larger banks, 60% for finance companies, and just 43% for online lenders.
Federal Reserve studies point to a significant satisfaction edge for community banking lenders among small businesses.
Goodwill like this can help position community institutions in the rebound. The pandemic was a game-changer for many of these institutions because it blew the doors wide open on digitization just as the federal government made them the face of loan distributions. Community banks played an outsized role in the process, disbursing more than 37% of all PPP loans, according to the Federal Reserve Bank of Kansas City.
Building on their success with PPP loan, many of these small lenders are now using their position and stature to generate more small business loans. Through May 2021, bank lenders overall had a 36% year-over-year increase in SBA 7(a) and 504 loans with $14.34 billion in originations, higher than any of the five previous years through the same period, according to S&P Global Market Intelligence. Not all of that is from community financial institutions, of course, but the SBA loan market is a good fit for them.
Luke LaHaie, president and chief investment officer of ACAP GP, told S&P Global that there could be “significant opportunity” from small businesses seeking loans of less than $100,000. “That’s always been an underserved or hard-to-serve market because, for banks, it takes just as much time as underwriting larger loans,” he said.
Nurturing Relationships Aren’t Enough
As community banks shutter their PPP programs, they need new ways to foster the relationships they established during the pandemic. Many are awash in deposits but tend to be short in loans and are starting to awaken to the opportunities they are leaving on the table. Capitalizing on this new environment will require these smaller institutions to upgrade their technology and back-office processes, Jared Rorrer, global head of commercial banking at Accenture, told The Financial Brand
Community banks and credit unions that want to compete in small business lending will need systems that can quickly approve and fund loans. They’ll also need greater transparency in the credit process to keep customers updated on what is happening with their loans, according to Rorrer. Finally, they’ll need a stronger focus on customer service that delivers a digital-first experience.
Small businesses love the personal connection, but like everyone, they also crave quick and simple digital access, including for credit.
“The largest banks are doing that faster and at scale,” warns Rorrer. “The pressure is mounting on community banks to keep up in a different dynamic around digital.”
Although some of them stumbled during the PPP program, fintechs are rapidly clawing their way into the small business lending market by making the process much simpler. Business owners may prefer working with their local credit union or bank, but it’s tempting to consider easy options that require little more than a few clicks on their phone.
The nonbank competition isn’t only from startups. Square announced in July the launch of new small business banking services and loans of up to $250,000 through Square Loans, offered under Square Financial Services, it’s industrial bank. Applicants can get a customized offer based on their card sales through Square then automatically dedicate a portion of their sales to payments. The offering of “no long forms to fill out” and not having to schedule any payments is a nearly automated form of lending.
Businesses question if the empathy community banks provide is enough to offset just clicking a button on their laptop, observes Rorrer. It won’t be for some borrowers, but for others, the consultant observes, “expertise and advice are differentiators. The banks that are making an emotional connection with their clients are those that are well positioned,” says Rorrer. Those credit unions and community banks that can combine their relationship skills with technology are the ones who will find new opportunities.
Big Banks: Threat and Resource
Some of the biggest banks got a black eye with their cumbersome PPP response. But that’s not stopping them now from aggressively pursuing new strategies to woo small business accounts with new digital engagement initiatives.
As BofA noticed business owners logging in more often and using tools like mobile check deposits, for example, the bank doubled down with additional digital features like remote virtual assistance. Erica, BofA’s digital assistant, can remind businesses when payments are due, and the giant institution offers an upgraded cash flow dashboard, third-party dashboard links, and free small business credit scoring.
But another megabank is taking a network approach to serving small businesses. Citi recently introduced Bridge built by Citi, a bank-led meeting place to connect businesses with regional, local, and community banks for loans of up to $10 million. The platform will initially include 18 banks through a pilot program across the Southeast and Rockies region. Bridge built by Citi will connect lenders and small business borrowers across these regions to offer more choice and convenience.
Richard Banzinger, head of Citi’s U.S. Commercial Bank, said that Citi is “committed to finding digital solutions that can make the process easier, more seamless and more equitable.”