Flexing its digital muscles, U.S. Bank is making an aggressive move to stem the threat from digital lenders in the small business market. Not only has the bank rolled out a modern loan platform that automates the process from application to funding, America’s fifth-largest bank is building it entirely in-house instead of partnering with fintechs.
“This is the first of several exciting digital initiatives we’re pursuing that we believe will better serve the needs of small businesses and consumers,” says Tim Welsh, the bank’s Vice Chairman of Consumer Banking Sales and Support.
The bold move could upset the balance of power in the world of small business lending — a market that’s critical to most community banks and a growing number of credit unions. Online lending has become a force too large for traditional lenders to ignore. According to data from the Federal Reserve, digital lenders in the small business market now sit in third place, at 24% behind large banks and small banks respectively.
But even these digital providers could find themselves at risk as the repercussions of U.S. Bank’s move ripple across the banking landscape. Startups such as OnDeck, Kabbage, Lending Club, and Fundbox, have been challenging the status quo by chewing into traditional institutions’ historical revenue streams. OnDeck, for instance, claims to be the world’s largest online lender to small business — the first digital player to surpass $10 billion in total loans to small firms.
But now the tables could turn once more, as the hunter becomes prey. Today’s challenger brand could become tomorrow’s victim — on the attack one day, playing defense the next.
U.S. Bank’s strategy could also impact midsize and smaller traditional banking providers — and well beyond this one application.
“It is one thing when a bank adopts new lending technology,” explains Chris Nichols, Chief Strategy Officer for CenterState Bank. “It is another thing when a bank creates a process to rapidly develop new technology, which is much more threatening.”
What U.S. Bank’s Digital Platform Does
U.S. Bank says single-owner businesses within the bank’s 25-state footprint can now qualify for up to $250,000 through an all-digital process. The application can be completed on any device — mobile, tablet or computer. Borrowers will be able to review loan terms, and electronically sign documents.
The bank claims that the entire process, from application to funding, can be completed the same day, “often within an hour or less.”
The platform also has a scheduling function that enables business owners to make appointments with a banker.
“This product had to be fully self-service — simple, transparent, easy to use and as intuitive as possible.”
— Scott Beyer, U.S. Bank
“We had two things in mind in developing this product,” says Scott Beyer, the VP at U.S. Bank who had overall responsibility for the team that developed the platform. “First, it had to be fully self-service — simple, transparent, easy to use and as intuitive as possible.
“Second, we wanted to give small businesses the opportunity to channel-switch if they choose,” Beyer continues. “They can complete an application online and then go to a branch to meet with a banker and pick the process right up.”
Seeking a Competitive Edge in Digital Channels
U.S. Bank is seeking to capitalize on three attributes valued by small-business borrowers: ease of application, speed of decisions, and low rates.
By contrast, digital startups can only meet two of these: ease of application and speed of decisions. Their rates typically are much higher than what traditional banking providers offer, something the Fed survey says frustrates small businesses about digital lenders.
Most traditional lenders, however, can compete with U.S. Bank for small business loans and match rates. But none will come close to matching the ease of application and speed of decision from the giant bank, unless they build or acquire similar digital capabilities.
“If banks ever want to reduce branch networks, digital small-business lending and deposit-account opening are essential.”
— Chris Nichols, CenterState Bank
Nichols with CenterState says digital lending is an imperative for traditional institutions that want to cut costs and remain relevant.
“If banks ever want to reduce their branch networks, digital small-business lending and deposit-account opening are essential,” Nichols warns. “Most analog-processed loans below $400,000 are unprofitable. Banks and credit unions will need to find a digital solution for their small business lending in order to drive down per-loan cost.”
Higher Expectations: ‘Fast and Hassle-Free’
“One of the major complaints of small businesses is the time it takes to borrow,” says Jim Marous, co-publisher of The Financial Brand and publisher of the Digital Banking Report. “Small business owners are very busy. The opportunity to complete the entire borrowing process digitally is a major leap forward to simplify the process and provide greater transparency.”
The Fed’s study of the small business lending market found that seven in ten small businesses that applied for a loan with a digital lender were influenced by the speed of the decision.
“It’s clear U.S. Bank understands what’s important to small businesses borrowers,” says Marous. “Word travels fast, so it will be interesting to see how quickly U.S. Bank’s move will disrupt market share.”
Both OnDeck and Kabbage play both sides of the small business lending game, working in partnership with traditional banking providers in addition to lending directly. OnDeck, for example, has partnered with JPMorgan Chase for a couple years now. There are also numerous other digital lending platforms, some of which work specifically with community banks and credit unions (e.g., Mirador or Numerated Growth Technologies, a spinoff from Eastern Bank).
Responding to the U.S. Bank development, Mirador CEO Trevor Dryer says “there is a higher expectation from borrowers that this process will be easy, fast and hassle-free.” He says digital lending capability is “becoming table-stakes” — not just in the small business market — and predicts that banks and credit unions lacking this capability will see their business start to evaporate in the next 12-24 months.
Build In-House vs. Partnering With Fintechs
At a recent investor conference, according to Bloomberg, U.S. Bank CEO Andy Cecere said, “We’re in a new era in banking. It’s digital. It’s technology and innovation. And we’re embracing this.”
A direct result of this thinking was that U.S. Bank chose to develop its new digital platform entirely in-house, rather than partner with a fintech provider as many financial institutions, including some the biggest, have done. Indeed, after Chase partnered with OnDeck, many experts expected a wave of similar deals. That hasn’t happened, though there have been some.
“The decision to white label or provide a digital-lending solution in an open banking manner has definitely been slower than expected,” says Jim Marous, “not only in small business lending, but also with consumer and mortgage lending.”
In U.S. Bank’s case, Beyer explains that the bank stayed in-house for two reasons:
- To keep costs down. There is a cost to partnership, says Beyer, and the bank wanted to be able to keep its rates “extremely competitive” on the digital loan products.
- To emphasize safety, soundness, and security. “We are a trusted institution with a solid reputation. This approach gives us the ability to manage and keep data in-house.”
Beyer, whose title is Agile Experience Owner, in addition to VP, oversaw the cross-functional team that developed the digital small-business loan platform. He describes it as an “agile, self-organizing” team in which decision makers from technology, product, underwriting, user experience and other areas regularly meet in one room, and are “not dependent on external decision makers.”
This approach enabled development work to be completed in just under six months on this project, following an initial six weeks of preparatory work.
Beware, This is Just the Start…
For now, just two types of loans are available on the digital platform, which the bank hasn’t yet branded. There’s the “U.S. Bank Quick Loan,” a general-purpose term loan, and “Cash Flow Manager,” a secured or unsecured line of credit.
Beyer with U.S. Bank notes that all loan terms — rate, length, amount — “are exactly the same as if the business person had walked into a branch to apply.” Human support is available for borrowers who need or want it, says Beyer. In addition to meeting with a banker in a U.S. Bank branch, the prospective borrower can contact one of a team of experts the bank has on call for extended hours.
As Beyer points out, few digital players lend completely end-to-end in an online environment. “Usually you have to get someone on the phone to complete the transaction,” he says, “or sometimes submit to a site visit, even for loans of just $250,000.” He notes that the bank’s branch network will complement and support its digital applications, but that the product is “scalable and well-situated to expand” beyond the branch footprint.
Beyer also says this is just the beginning, as the bank has plans to add new products and push its platform in new directions — more cause for concern among traditional- and digital lenders alike.
“This is really the beginning of our digital-first lending strategy,” Beyer explains. “We’re continuing to develop functionality on an ongoing basis.”
How Traditional Small Business Lenders Can Stay in the Game
U.S. Bank has enormous resources to tap. For everybody else, partnering will most likely remain the option of choice for many financial institutions.
“Many banks will partner with — and likely invest in —these digital platforms in order to gain quick traction,” says Nichols. He believes that strategically there is huge value in being among the first movers in your market.
“My advice to any bank is to partner first, test the market and the workflow, and then build your own,” says Nichols, “unless you can get flexibility and favorable economics [from partnering].”
In its digital small-business lending report, Forrester offers five suggestions for banks and credit unions to “outsmart” the digital disruptors.
- Digitally transform to provide faster, simpler loans.
- Partner with or buy digital business lenders and platforms.
- Offer more tailored underwriting and pricing.
- Provide better services for borrowers, including advice and tools such as dashboards.
- Connect small business customers and investors — an online funding platform.
Overall, the research firm says traditional lenders must “focus relentlessly on understanding the needs of your customers so that you can give them more of what they want, more quickly than before.”