The whole PPP episode is turning out to have a long tail. Not the actual credits (mostly), but how it changed business owners’ view and expectations of lenders.
“One of our bank customers came up to me a few months ago and said, ‘You’ve created a monster for us’,” relates Dan O’Malley, Founder and CEO of Numerated, a fintech loan technology company. O’Malley says the senior banking exec told him, “We’ve shown customers how good it can be and now we can never go back to the old way.”
O’Malley, who worked at Capital One and Eastern Bank before launching Numerated in 2017, has high praise for the banking industry’s response to the Covid credit crisis. However, he warns that the progress made then in speeding-up the business lending process was really just the beginning of changes the industry must make to stay competitive in what for many institutions is their bread and butter business.
The urgency of his message comes from the intersection of several trends, some of long duration, some quite recent. These are: changed customer expectations, increased competition, diminishing prospects for some commercial real estate lending and the convergence of fintech and banking.
O’Malley spoke with The Financial Brand about these trends. After being spun off from Eastern Bank, Numerated initially concentrated on the fully digital microloan platform O’Malley’s team had created at Eastern Labs. The application can take a borrower from start to funding in three minutes. The company has since expanded into larger business loans and, with its late 2021 acquisition of Fincura, can now automate the often complex process of analyzing business financial statements. Numerated works with 130 banks and credit unions ranging in size roughly from $80 million in assets to $200 billion.
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Impact of Shifting Market Forces
Many of the fintech’s clients are exploring (or expanding) small business and commercial and industrial (C&I) loan opportunities, according to O’Malley. The reason is due to diminishing growth prospects for commercial real estate (CRE) lending, a mainstay of many community and regional bank portfolios.
The problem, he says, is that it’s tough to make money in C&I lending in the current market with an inefficient process, and banks, historically, have been very inefficient in business lending.
Automating your internal loan process is good, but is only part of the job. The goal should be a great experience for business borrowers from the application on.
And with small business lending, banks and credit unions not only face competition from American Express, the number one small business lender in the U.S., but from B2B neobanks such as Rho, Mercury and North One.
Traditional institutions have advantages of trust, brand and cost of capital, O’Malley states, but he says that to succeed in a changed business lending market they will need to improve the experience as well as the process, on the one hand and adopt a niche strategy.
“You’ve got to pick the lending area you want to specialize in and then be the best in the market,” O’Malley believes. That goes for banks and credit unions and for fintechs as well.
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In the End, Everybody Will be a Fintech
“I don’t think we’ll be talking about ‘fintech’ in five to ten years because anybody involved in financial services is going to have to have a fintech mentality,” O’Malley states. They’ll have to, he adds, because all customers will demand better experiences. If that timeframe seems long, he explained during a Lendit Fintech podcast that “it always takes longer than you think.”
Traditional financial institutions tend to be inward looking, he observes. Nevertheless, O’Malley predicts the next stage of banking’s evolution will be a wave of partnerships between many different service providers — fintechs and others — at least for the banks and credit unions that have that mindset.
“Banks need to be able to put their product wherever customers want it, now,” O’Malley said on the podcast. “That can be on their website or it could be embedded in other channels, but it needs to be where the customers are.”
A big-bank example is Goldman Sachs offering financing for Amazon merchants, but all institutions will need to consider doing something similar.
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In speaking with The Financial Brand about the convergence of banking and fintech, O’Malley says he firmly believes all financial institutions are going to have to think about themselves as technology companies in terms of how they deliver their product.” There is still some resistance to that concept within the industry, he notes, but within ten years “that battle will be over. Nobody will really be able to deny it.”
The flip side of that is the trend of technology companies increasingly entering financial services with well-known examples including Apple, Google, Facebook and Amazon. And so the line between tech and banking “is just going to be so blurred as to not even be relevant anymore,” O’Malley states.
There’s also a blurring of the lines between fintechs and tech companies. “Our software sits at AWS on Amazon,” he states. “We wouldn’t put the service together ourselves, that would be crazy. We do it in the cloud.”
Partnering Even for Core Products
So how does this relate to business lending? When a bank or credit union goes to market, O’Malley postulates, why should they only use their own balance sheet, especially if they don’t necessarily have the expertise to book every type of credit that customers might want?
“In the digital world, I can provision a credit product in real time. Does it matter to the customer if it’s my product or not? I would say it doesn’t.”
— Dan O’Malley, Numerated
“I believe financial institutions are increasingly going to think about partnering up, even for core lending products,” he maintains.
“In the digital world, I can provision a credit product in real time. Does it matter to the customer if it’s my product or not? I would say it doesn’t,” says O’Malley “All the customer cares about is ‘I have a need a key need and you satisfy my need’.”
This is not a completely new concept, he points out. When he worked at Capital One in the 1990s, one of his major competitors, MBNA, was in the business of originating credit cards for banks that didn’t have a card program. And it’s long been true with insurance and investment products. The difference now is that business lending will become more niche-focused partnering will of necessity become commonplace.
Banks and credit unions may find partnering with multiple entities daunting to set up. But Numerated, and other fintechs that were built on that principle from the get go, may be able to help. Says O’Malley: “We’re working on ideas to be able to take fintechs that offer products themselves and bring those products onto our platform. Some of these may be products that banks don’t currently offer.”
Relationship Banking Isn’t Dead
Banks and credit unions continue to wrestle with how to deliver a superior digital lending experience and still maintain the kind of human relationship business bankers prize.
Large banks will embrace at least some fully digital business lending for the efficiency. Community institutions will keep a human involved for the cross sell.
“There’s not really any doubt that you need to put up a digital business loan application at some point in time,” O’Malley observes. Business borrowers, after all, are consumers, too, and know what’s possible. However, how and when a business owner might choose to fill out that digital application, and how you want to deliver the loan, and whether you want a banker in the mix at some point “are all questions that smart banks are digging into and thinking about,” says O’Malley.
“They will have different answers depending on their brand,” he adds.
For example, small regional or larger financial institutions are generally going to be comfortable having a self-service application, particularly for existing customers, says the fintech CEO. “It’s great for their efficiency and they care a lot about efficiency.”
Smaller institutions, on the other hand, care more about growth than they do about efficiency, he adds. “So they might put up a digital application, but as soon as it comes in they’re going to reach out and call that customer, to see what else they might need.”
They’re both equally valid strategies, O’Malley believes. It’s a lot like the retailing business, he notes, and banks and credit unions are money retailers, after all. Some retailers differentiate through high service and are more expensive. Others have cheaper prices and less service. And then if you just want to do it all yourself, with no service at all, you’ve got Amazon.