Nonbank competition for small business banking both on the lending and deposit side was already accelerating when the coronavirus pandemic arrived. Now the urgency for traditional small business lenders to up their game has hit a critical juncture. They must adapt or dwindle.
Fintechs and other companies gained a COVID-19 speedpass to the front of the competitive line with the advent of the U.S. Paycheck Protection Program and similar efforts in other countries. Nonbank online lenders like Kabbage offered tech-enabled fast access to PPP, even while community banks stole a march on many larger banks by pulling all-hands shifts to get the federal loans to their customers as well as others. Some of the community banks tapped fintech partners and vendors to get up to speed fast.
COVID-19 and its economic impact fit fintechs like a tailored suit. Beyond speed, the very nature of these companies as internet-based players dovetailed with a time when the ability to do business banking in a contactless way was at a premium.
“Fintech startups are born digital. This means they use cloud technologies, leverage emerging tech, operate with agility and have the ability to scale quickly,” says Zhi-Ying Barry, Senior Analyst at Forrester. “They were able to build solutions to facilitate PPP loans in a matter of days.”
Urgency of Pandemic Crisis Stoked Fintechs’ Engines
Some of these fintechs will continue to help incumbent banks to accelerate digital transformation. But others have advanced beyond the efforts they’d already made. Typically fintech business loans carried higher rates than bank credit, but appealed to many busy small business owners because they promised ease of application and response through 24/7 online portals.
PPP was all about speed. Fintech lenders made billions of PPP loans. Kabbage alone chalked up $7 billion and claimed to be the second-largest PPP lender by loan application volume. Intuit reported during earnings season that its QuickBooks Capital operation had facilitated $1.2 billion in PPP loans.
While that’s only a fraction of the traditional banks’ production, it’s significant proof of what such firms could do in a very short period with a credit type where they were going head-to-head with the legacy providers — terms were identical for all lenders and PPP borrowers.
“PPP was just the opening bell of a fresh round of competition, with some hope of ‘coopetition’.”
The business banking game isn’t going to revert to the old rules and the old playing field.
“COVID-19 has exacerbated the liquidity challenge that small and medium-size businesses globally face,” states a Forrester report by Barry. “Many incumbent lenders have been forced to transform their systems and processes to help SMB customers access government-backed loans.”
Digital business loan origination has become the name of the game now, according to Barry’s report. Many smaller banks will have to find a way to compete for nongovernmental loans without burning out their staffs.
And Barry indicates that the clock is ticking.
“Lenders can no longer delay their SMB lending transformation,” the report states. “Accelerating this transformation makes good business sense and is an opportunity for lenders to demonstrate purposeful leadership and counter antipathy toward big banks.”
Some larger institutions garnered reputational black eyes when would-be borrowers found themselves shut out of the big bank’s PPP portals early on. At the same time Twitter and other platforms were filled with small banks’ updates on how much they were processing.
But PPP was just the opening bell of a fresh round of competition, with some hope of “coopetition.”
Small and Medium-Sized Businesses Won’t Settle for Old Ways Anymore
“The most important takeaway from the PPP experience is the mindset change,” says Barry in response to emailed questions from The Financial Brand. “Previously, incumbent banks wouldn’t fathom being able to build a business case, secure budget, and then execute in a matter of weeks. Most projects typically take six months, if not years, before being implemented. But COVID-19 has forced lenders to transform; and for some traditional lenders, they’ve shown the ability to be agile rolling out PPP platforms quickly. Banks also had to shift their mindset and accelerate e-signature acceptance and adoption.”
Just as consumers have grown used to these channels, small and medium-size firms have seen what traditional banks can do when put to it. For an industry that, especially among smaller banks, emphasized the personal connection and the feel of the “handshake” loan, that will be a “nice to have” but not the tie-breaker anymore.
“Small and medium-sized businesses value partners who understand their business and want to help them solve their business problems,” says Barry. “However, SMBs’ expectations of those who they work with are much higher now. They won’t accept having to wait days, if not weeks, for banker to call them back, or not being able to complete their tasks on digital touchpoints.”
A Fresh Light on Amex’ Purchase of Kabbage
This shift in attitude throws an illustrative light on the summer 2020 announcement of the acquisition of Kabbage by American Express. Amex has been a significant player in small business credit for years, through card-based products and its “Small Business Saturday” buy-local push each fall.
But Barry says traditional financial institutions have to look beyond the headline of Amex buying a fintech lender.
“The greatest significance of the acquisition is the small business insights that Amex will get access to,” says Barry. “It’s still very challenging for firms to have a deep understanding of SMBs because data and information about SMBs are scare. This makes it hard to assess these companies’ financial health.”
Barry believes this is a key part of the deal: It brings American Express access to a huge base of businesses’ performance. At the time of the merger Kabbage stated that it had served over half a billion firms over its 11-year existence, lending over $16 billion.
She points out that American Express also picks up the full-suite of fintech products Kabbage offers its customers, including cash-flow tools.
“We expect to see more acquisitions going into 2021, as software and payment providers, tech giants and banks acquire fintech startups in the SMB space,” says Barry.
Ecosystems Will Begin to Give Traditional Banks a Literal Run for the Money
The technical edge is helping fintechs and similar firms to bring new methods to serving small and medium-size firms. Barry’s report notes four trends:
- Integrating real-time data to assess creditworthiness.
- Using alternative sources of data to augment credit models.
- Leveraging emerging technologies for credit analysis.
- Building small business services and ecosystems.
Regarding the latter, the report notes that from different starting points nonbank firms are building out systems that provide many of the services of traditional banks in new ways. Both Kabbage and Intuit added business deposit accounts to their lineups during the summer of 2020, for example. The recipes for these ecosystems vary in the blend of in-house offerings and partner services.
Barry says it is still early days in this movement. Banks and credit unions with business lending areas need to watch this and see how to adapt some of the ideas the nonbanks try.
“There are multiple players across various sectors — including accounting software providers, tax software providers, tech giants, fintech startups — looking to help SMBs solve their business problems,” says Barry. The lines of who does what are blurring and the challenge, as banking firms move into the “tech” and as nonbanks move into the “fin,” will be differentiating one ecosystem from another. In a sense, all firms have to avoid the risk of recreating a commoditized business that already existed, just a faster version.
Barry points to Stripe and Xero as leaders that have emphasized partnerships to help SMBs run and manage their businesses. Stripe’s large array of partners includes Azlo, majority owned by BBVA. Xero’s website lists seven banking partners.
“We’re already seeing various players racing to build compelling ecosystems for SMBs with COVID-19, and this will continue going into 2021,” she predicts.
What Can Traditional Institutions Do in Response to Ecosystem Builders
Ecosystems encompass the latest in technology, but in terms of functionality, much of what you are talking about is still commercial banking — on steroids, of course.
Barry points out that while banks have prided themselves on knowing their business customers, SMBs don’t necessarily feel so well known. A first step is to work much harder for that understanding.
“Firms need to do deep customer research to understand who their SMB customers are, their pain points and how these customers would like to interact with their financial services providers,” Barry suggests.
A key point is simply understanding what convenience means to SMB owners and operators. Increasingly business people wonder why the ease of modern digital banking can’t be replicated on the commercial side of the same institutions. Barry says making it more seamless to move from mobile access to online access and back again would be a good move.
Another strategy Barry recommends is finding the best that fintechs offer and combining it with the best that traditional financial institutions offer. Quality plus speed will be strong factors. Blending fintech innovation into the mix could help banks and credit union business departments to better manage risk in real-time, improve portfolio monitoring and servicing, and improve debt collection, she says.
Partnerships will be helpful, and banks don’t have to resign themselves to the role of “dumb pipes.”
“Those that will still play a customer-facing role are those who have built deep, trusting relationships with their SMB customers,” she says.
“It’s no longer about owning the product, distribution or making customers go to you — it’s about the platform, maximizing the value of the ecosystem, taking multiple routes to market and taking services to customers,” she says. “Those firms that are able to make that mindset shift are the ones more likely to succeed.”