July 21, 2020 - 566 views|
Large banks dropped the ball on small business lending through the Paycheck Protection Program. Here’s how they can get back in the game.
COVID-19 changed the stakes in small-business lending: While the top four banks provided 36% of small-business loans before the pandemic, they disbursed a scant 3% in the first round of the CARES Act Paycheck Protection Program (PPP).
As large banks fumbled their PPP response, fintechs and smaller lenders stepped in to fill the gap. Online marketplace Lendio was among the standouts, facilitating $8 billion in PPP loans through its network of approved lenders. So was N.J.-based Cross River Bank, which underwrote 106,000 PPP loans worth $4.6 billion. For its efforts, Cross River expects to collect $163 million in fees, or 170% of its 2019 revenues.
While that’s a drop in the bucket for large banks, it’s also a warning sign of a more ominous trend: Without a course correction, they risk losing the lending market for small and mid-sized businesses (SMB).
When Small Isn’t Beautiful
Banks’ struggle to serve SMBs isn’t new. Small-business lending has always been a difficult fit within large banks’ portfolios. The loan amounts are modest, and borrowers’ profile risks are high due to a slew of factors that include limited operating history and heightened exposure to economic downturns, as well as a lack of collateral, financial resources and succession planning. In addition, small businesses typically can’t afford the fee-based services such as treasury management that are the bread and butter of large banks.
The SMB market was already tilting away from large banks before COVID-19. In 2016, small banks approved at least some of the amount requested for 76% of SMB applicants, while large banks approved 58% of applicants, according to a survey from the Federal Reserve Bank of Richmond.
Further, small banks earned a satisfaction score of 75 among approved SMBs compared with a score of 51 for large banks.
Capitalizing on Opportunity
Digital technology gave the final push – and the edge to small banks and fintechs. By lowering service costs and the barrier to entry, digital technology made it profitable to serve smaller accounts – a change fintechs in particular have leaped on.
It’s not hard to see the fit. Fintechs and alternative lenders boast advanced digital platforms that make the lending process simple and fast. Decisioning and funding is quick, typically less than a week. Point-of-need lending solutions are easy to use.
Yet large banks can’t afford to ignore SMBs. Small business is an anchor of the GDP – and banking. Representing one-fifth of global banking revenues, SMBs generate $850 billion of annual revenue for banks, a pool expected to grow 7% annually over the next seven years. The gig economy is further changing the look of small business: 32% of small businesses have only one employee, and that number is expected to grow as more people adopt the freelance model of work. PPP has shone a spotlight on the need to support this critical sector.
How to Course-Correct
For large banks, the opportunity with SMBs lies in valuating them in a different manner. Rather than the traditional model of commercial underwriting, lending to SMBs is in many ways more akin to consumer loans.
Here are some tactics large banks can take to boost revenue by capitalizing on the SMB market.
The unintended consequence of the coronavirus pandemic is that it reinforced the SMB marketplace’s move away from large banks that was already underway. There’s no going back to the old ways, and neither large banks nor SMBs want to.
To learn more, please visit the Paycheck Protection Program Forgiveness Solution section of our website.
Visit our COVID-19 resources page for additional insights and updates.