I’m not convinced any of us are clairvoyant enough to really make predictions about the future of small-business banking generally or small-business lending specifically, but with what we know about current trends, we can identify some possibilities. First, what we know:
- There are half as many community banks today as there were in 1985
- Some community banks have been consumed by bigger banks and some have simply failed
- Although credit has eased somewhat for larger small businesses and big business since the recession, it hasn’t for the smallest small businesses
- Alternative (non-bank) lenders have entered the small-business lending space and are capturing loan business that would have traditionally gone to community banks
- The Millennial Generation and technology is causing many community bankers to re-think the way they offer services and interact with their customers
At the outset, I should probably identify myself as a 50-something boomer. And, although I do the lion’s share of my personal banking online via my smart phone, there are times when I want to speak with a live person or visit the local branch (although I can’t remember the last time I was in my local branch). My paycheck is direct deposited into my checking account and I pay most of my bills online, so I seldom need to go into the bank. I do frequent the ATM machine and I vividly remember the last interaction I had over the phone with a delightful teller who took care of my transaction with aplomb.
I don’t think I’m an outlier, but I think it would be a mistake to assume a correlation between how I do my personal banking and the way many small businesses interact with their bank or credit union. Technology alone is not the solution to what ails small-business banking or small-business lending.
Do half as many banks mean we need to work twice as hard?
I have a contractor friend who remodels hotels and office buildings. “It’s dirty work that most contractors don’t like to do,” he says. “That is, until new construction disappears and they need work.” He suggests the relationships he’s built over the last 30 or so years (which is about how long I’ve known him) keep his crew working through good times and bad.
I think this is relevant to community bankers. Since 2008 and the start of the recession, many bankers made the decision to move upstream to bigger and potentially more lucrative business clients. Regulations make it expensive to work with the smallest small business owners, and who can blame those bankers if they choose to walk away from that market? I can’t—even though I think it’s shortsighted. A few months ago I was introduced to a local community banker who takes her role in her community seriously. A single-branch bank in the small community of Holladay, Utah, Traci Flynn and Holladay Bank & Trust recognize the importance of local small business. Those businesses create the most jobs and strengthen local communities.
I’m not convinced community bankers need to work twice as hard, but I am convinced they need to focus more on the small businesses in their community by helping those business owners with the messy work of credit repair, taking the extra time to find reasons to say yes to a less-than-perfect small-business loan application, and get down in the weeds by using technology to streamline loan processes and underwriting requirements to enable them to make the smaller loan amounts needed by Main Street businesses a bigger part of their bank’s business.
Put those “relationships” community bankers like to talk about to work.
Do community banks really want to compete with alternative lenders?
The short answer is yes, but I don’t think that’s really the complete answer. Alternative lenders are focused on loan amounts around $10,000, $20,000, or $30,000—the amounts many Main Street business owners would likely consider a large loan, but bankers often consider too small to deal with. Granted, alternative lenders charge a premium to deal with those smaller loan amounts and the credit risk associated with lending to small business owners who have less-than-perfect credit.
The disparity is illustrated by the average SBA 7(a) loan amount last year at right around $380,000. Although the SBA isn’t the only small business lending done by community banks, I believe it sets the tone. What’s more, the removal of fees associated with 7(a) loans of $150,000 or less is a step in the right direction toward encouraging their member banks to work with small business owners seeking the smaller amounts.
There are community and regional banks merging with alternative lenders to broaden the number of loan products they can offer—which is one approach. Community bankers are in a unique position. They are still the first place most small business owners go to find a small business loan. An enviable position to be sure. Doesn’t it make sense to capture as much business as possible before small business owners start looking online for alternatives? If only 10 percent of the small business owners that go to the bank get the financing they need, it seems like a pretty inefficient way to do business to me.
Mobile, mobile, mobile
Although I do most of my personal banking online via my smartphone. I wouldn’t suggest, as seems to be very popular today, that technology will solve all the problems for community bankers, but I would argue that ignoring technology is a quick way to become irrelevant. The trick is implementing technology where it makes sense and stripping it out of the process where it doesn’t. Here’s what I mean:
- Answer the phone with a live person. I don’t remember the last time I was actually in my branch, but I vividly remember the conversation I recently had over the phone—once I finally escaped the automated system and finally spoke to a very helpful person. I’m not sure forcing me to go through a handful of automated steps before I can talk to a real person is the best way to build “relationships,” do you?
- Equip your loan officers with the technology they need to streamline the small-business loan process and expedite the time it takes to acquire loan approval. Many forward-thinking bankers are turning to technologies that have been proven successful over the last few years, outside of small-business lending, to interact with customers and potential customers, make the loan process more transparent, and actually close more loans.
- Embrace technology that enables better communication, more transparency, and quicker response. If it doesn’t improve your ability to add value to the process, don’t use it.
The future of small business lending is really more a paradigm shift than it is an implementation of new technology. As long as we remain stuck in past attitudes of what small business lending used to be, we’ll be hard-pressed to make good decisions about what the future holds.
What do you think?