Profitable SMB Lending is Key to Maintaining the Depositor Relationship

With the right strategies in place, banks can turn SMB lending into a new profit center while maintaining wallet share on third-party lenders.


Growing deposits was a main priority for banks in 2023 and will likely continue to be a main focus through 2024. Banks’ concerns over small business deposits, specifically, increased from 41% in 2022 to 72% in 2023. At the same time, many banks have deprioritized lending. However, data indicates that rather than being an either/or scenario, deposits and lending have a symbiotic relationship. In a recent survey, 66% of respondents indicated that lending is critical to their small business deposit retention strategy.

Deposit relationships are far stronger and more profitable when cross-sold with a lending product. Data from Curinos found primacy drives 8x fee revenue, 10x deposit balance, and 7x operating deposits compared to non-primary customers.

Yet, some lending products provide wider coverage of the deposit base than others. A commercial real estate loan, for example, serves one depositor while the same assets could serve 50 smaller businesses when packaged as SMB loans. The commercial real estate market is also becoming increasingly risky for lenders as prices have dipped 11% due to rising interest rates and lower demand for office and retail spaces. 

Given that SMB deposits are far less costly and SMBs with a lending relationship drive 2.3x more deposits, profitable SMB lending may be the crux of navigating the current financial landscape and staying competitive in the future.

Prequalify existing depositors.

However, lenders have traditionally thought about SMB lending as an independent upsell rather than relying on deposit analytics as the basis to grow the relationship. By combining deposit data with third-party sources, banks can accurately prequalify business owners for a loan against a transaction policy. 

Now, instead of an impersonal direct campaign encouraging all depositors to apply for a loan, the bank can send a highly personalized message indicating the business owner has been prequalified for a loan up to the determined amount. This not only improves the impact, and by extension ROI, of those marketing campaigns, but also shows the depositor that their bank or credit union has their back. 

Of the over 6 million employer firms in the U.S., 40% seek a loan, line of credit, or cash advance in a given year. While the number of SMBs that initially respond to a prequalified loan will be lower, the uptake will grow over time as the timing matches up with the business’s needs and cyclicality throughout the year.

Build a digital loan experience.

The seamless experience described above highlights another attribute of small business lenders. SMB lenders’ preferences in how they interact with a bank or credit union are much more like a consumer than corporate or commercial borrowers. This includes a preference for digital experiences. 48% of borrowers now prefer to apply for a loan or line of credit via an online lender or a bank’s mobile app

To meet these borrowers’ needs, financial institutions need a digital loan experience that is fast, personalized, and secure.

The good news is that technology that makes SMB lending faster can also make it more secure. An underwriting solution with automated checks of business ID and criminal background creates a faster, less intrusive experience while better identifying potential fraud cases.

Boost SMB lending profitability.

Of course, increasing revenue from deposits doesn’t do much good if the bank loses too much revenue for every SMB loan deal closing. Many banks without automated decisioning then end up in a Catch-22. They need to increase their volume of SMB loans to improve depositor retention, but SMB lending is itself unprofitable. Banks that adopt automated decisioning and underwriting, however, can dramatically reduce the amount of manual labor required to underwrite an individual loan and turn SMB lending into a new profit center for the bank.

Maintain wallet share on third-party lenders.

The demand for funding in the SMB market is huge, and those SMBs will continue to seek it wherever they can find it. 30 years ago banks owned deposits and lending, but accessibility to SMB loans decreased with the decline of community banks. Then the 2008 financial crisis spurred the creation of alternative lenders who offered an alternative to small businesses. In the latest small business credit survey, 33% of SMBs applied for credit via an online lender or fintech company.

Now, many fintech companies are moving beyond lending into deposits. Block, for example, recently announced in their annual letter to shareholders that they see their Cash App Card as a gateway to customers adopting Cash App as their primary banking solution. 

In the letter CEO Jack Dorsey highlighted the value of a customer with a lending and deposit relationship, “We see a meaningful step up in value and engagement as customers choose to deposit their paycheck with us: Cash App Card actives who deposit at least $2,000 of paychecks per month spend nearly 6x more than Cash App Card actives who do not deposit a paycheck with Cash App.”

As fintech companies continue to dive further into the world of deposits and discover their value, they’ll likely shift from seeing deposits as a nice addon to a core product they aggressively promote.

Wholistic offerings are now paramount.

Growing deposits is critical in the current economic environment, but deposits are no longer a guaranteed stronghold of the banking industry. Competition is continuing to grow not just from alternative lenders but from digital-first companies that offer a streamlined customer experience. Banks and other financial institutions will need to cement their foothold in the market through increasingly complete, efficient, and digital offerings for SMB depositors – and this must include profitable SMB lending. 

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