There were nearly 32 million small businesses in the United States at the end of the third quarter in 2020, according to the Small Business Administration.
That means 99% of all businesses in this country are small businesses, which is defined by the agency as 500 employees or fewer. They employ nearly 50% of all private sector employees and account for 65% of net new jobs between 2000 and 2019.
Many of the nation’s newest businesses are concentrated in industries like food and restaurant, retail, business services, healthy, beauty and fitness, and resident and commercial services. This is a potentially huge opportunity for your bank, if it’s ready and equipped for when these entrepreneurs come to you for financing. But if your bank is not prepared, it may be leaving serious money on the table that could otherwise provide a steady stream of valuable loan income.
That’s because these are the ideal customers for a SBA loan. If that’s not something your bank offers yet, here are three reasons to consider adding SBA lending to the loan portfolio this year.
1. New Avenue for Long-Term Customers
Small business customers often provide the longest-term value to their banks, both in terms of fee income generated and in dollars deposited. But not having the right loan solution to help new businesses launch or scale means missing out on a significant and lucrative wave of entrepreneurial activity. That’s where SBA lending comes in.
SBA loans provide the right solution to small businesses, at the right time. It’s an ideal conversation starter and tool for your bank team to turn to again and again and a way to kick off relationships with businesses that, in the long run, could bring your bank big returns. It’s also a great option to provide to current small business customers who may only have a deposit relationship.
2. Fee Income With Little Hassle
In addition to deeper relationships with your customers, SBA lending is an avenue to grow fee income through the opportunity for businesses to refinance their existing SBA loans with your bank. It broadens your portfolio with very little hassle.
And when banks choose to outsource their SBA lending, they not only get the benefit of fee income, but incur no overhead, start up or staffing costs. The SBA lender service provider acts as the go-between for the bank and the SBA, and they handle closing and servicing.
3. Add Value, Subtract Risk
SBA loans can add value to any bank, both in income and in relationship building. In addition, the SBA guarantees 75% to 85% of each loan, which can then be sold on the secondary market for additional revenue.
As with any product addition, your bank is probably conscientious of the risks. But when you offer the option to refinance SBA loans, your bank quickly reduces exposure to any one borrower. With the government’s guarantee of a significant portion, banks have lots to gain but little to lose.
Community banks find themselves in a high-pressure lending environment, as businesses rebound from the depths of the pandemic and grapple with inflation levels that have not been seen for 40 years.
This economic landscape has created ample opportunity for growth among business lenders, but the rising demand for capital has also invited stiffer competition. In a crowded market, tech-savvy, radically efficient lenders — be they traditional financial institutions or alternative lenders — will outperform their counterparts to win more relationships in an increasingly digitizing industry. Banks can achieve this efficiency by modernizing three important areas of lending: Small Business Administration programs, small credits and self-service lending.
Enhancing SBA Lending After successfully issuing Paycheck Protection Program loans, many financial institutions are considering offering other types of SBA loans to their business customers. Unfortunately, many balk at the risk associated with issuing government-backed loans and the overhead that goes along with them. But the right technology can create digital guardrails that help banks ensure that loans are documented correctly and that the collected data is accurate — ultimately reducing work by more than 75%.
When looking for tools that drive efficiency in SBA lending, bank executives should prioritize features like guided application experiences that enforce SBA policies, rules engines that recommend offers based on SBA eligibility and platforms that automatically generate execution-ready documents.
Loans that are less than $100,000 are customer acquisition opportunities for banks and can help grow small business portfolios. They’re also a key piece of creating long-term relationships that financial institutions covet. But to compete in this space, community institutions need to combine their strength in local markets with digital tools that deliver a winning experience.
Omnichannel support here is crucial. Providing borrowers with a choice of in person, online or over-the-phone service creates a competitive advantage that alternative lenders can’t replicate with an online-only business model.
A best-in-class customer experience is equally critical. Business customers’ expectations of convenience and service are often shaped by their experiences as consumers. They need a lending experience that is efficient and easy to navigate from beginning to end.
It will be difficult for banks to drive efficiency in small credits without transforming their sales processes. Many lenders began their digital transformations during the pandemic, but there is still significant room for continued innovation. To maximize customer interactions, every relationship manager, retail banker, and call center employee should be able to begin the process of applying for a small business loan. Banks need to ensure their application process is simple enough to enable this service across their organization.
Self-Service Experiences From credit cards to auto financing to mortgages, a loan or line of credit is usually only a few clicks away for consumers. Business owners who are seeking a new loan or line of credit, however, have fewer options available to them and can likely expect a more arduous process. That’s because business banking products are more complicated to sell and require more interactions between business owners and their lending partners before closing documents can be signed.
This means there are many opportunities for banks to find efficiency within this process; the right technology can even allow institutions to offer self-service business loans.
The appetite for self-service business loans exists: Two years of an expectation-shifting pandemic led many business borrowers to prioritize speed, efficiency and ease of use for all their customer experiences — business banking included. Digitizing the front end for borrowers provides a modern experience that accelerates data gathering and risk review, without requiring an institution to compromise or modify their existing underwriting workflow.
In the crowded market of small business lending, efficiency is an absolute must for success. Many banks have plenty of opportunities to improve their efficiency in the small business lending process using a number of tools available today. Regardless of tech choice, community banks will find their best and greatest return on investment by focusing on gains in SBA lending, small credits and self-service lending.
Community banks that are considering entering the small business lending space are already challenged by several barriers to entry:
Inefficiencies in traditional loan processing.
Changing regulatory guidance.
The belief that small business loans are not profitable.
A lack of quality lending opportunities to put their deposits to work.
New competition from emerging categories, including fintechs, challenger banks and neobanks.
Given these obstacles, it’s not surprising that many community financial institutions have chosen to steer clear of small business lending — but there is a solution powerful enough to overcome all of these obstacles. This solution allows community financial institutions to profitably offer small business loans that are efficient, convenient and compliant. And that is the power of a digital loan platform.
Digital lending platforms leverage end-to-end, cloud-based technology to automate the entire lending process — from application and underwriting to set up, review and renewal. Banks gain the competitive muscle to provide small business loans efficiently, quickly and profitably.
1. Save Time and Cost
A turnkey platform is automated, reducing the lengthy manual processes involved and eliminating the need for additional loan officers. It costs significantly less to originate each loan, even the smaller loans.
2. Automate Booking
A good digital platform gives banks the ability to import loan files directly into the core to book and fund the loans. It should also integrate with numerous third-party systems to automate booking and funding the loan.
3. Expand the Pipeline View
The platform should offer the analytics and the ability to track how many people are viewing, starting and completing a loan application, so you can do a better job forecasting the week ahead.
4. Use a Dynamic, Intelligent Application
Digital applications usually employ a rules engine to guide the borrower through each step and identify exceptions or incomplete sections. The best platforms will recommend the most appropriate types of loans or redirect users to other channels.
5. Your Underwriting Policy
A digital platform will use your institution’s specific underwriting standards for each specific loan product. It will not force adoption of its own embedded underwriting standards.
6. Track Loan Status
A platform can give bankers better visibility to the stages that have been completed at each step of the process, helping to facilitate cross-departmental communication and accelerate the loan’s processing time.
7. Renew and Review
For a bank’s existing portfolio, a digital platform will automate the collection of data, send communications to borrowers and provide a dashboard view of annual renewals or interim reviews, reducing time and cost by as much as 50%.
8. Automate Financial Analysis and Spreading
Cloud-based software solutions eliminate the need to manually spread deals. The lending cycle becomes more productive, since applicant qualification is determined in seconds.
9. Manage Documents Effortlessly
All documents should be housed in one central location. This creates a user-friendly portal for both the customer and lender, where all materials can easily be collected, requested, shared, processed and tracked.
10. Maximize Loan Volume
Not only can a digital, automated system increase the profitability of each loan, but the bank will be able to dramatically increase loan volume. A digital application is like having an army of loan officers at the ready 24/7.
11. Aggregate Data, Minimize Risk
Digital technology collects and aggregates all of the data a financial institution needs to decide on a loan, then compares that data to its unique credit policy and risk rating metrics.
12. Utilize Third-Party Data and Analytics
Any digital platform should be integrated with the industry’s leading third-party sources to access necessary information more efficiently, such as small business credit data, tax records, regulatory and compliance updates and more.
Community banks are the beating heart of the American banking system — and they’ve received a major jolt to their system.
While community banks represent only 17% of the US banking system, they are responsible for around 53% of small business loans. Lending to small businesses calls for relationship skills: Unlike lending to large firms, there is seldom detailed credit information available. Lending decisions are often based on intangible qualities of borrowers.
While community banking is relationship lending at its very best, the pandemic is forcing change. Community bankers have been caught in the eye of the Covid-19 storm, providing lifesaving financial services to small businesses. They helped fuel the success of the Paycheck Protection Program, administering around 60% of total first wave loans, according to Forbes. This was no small feat: Community banks administered more loans in four weeks than the grup had in the previous 12 months.
However, as with many businesses, they have been forced to close their doors for extended periods and move many employees to remote arrangements. Customers have been forced to move to online channels, forming new banking habits. Community banks have risen to all these challenges.
But the pandemic has also shown how technology can augment relationship banking, increase customer engagement and drive revenue growth. Many community banks are doing things differently, acknowledging the need to do things in new ways to drive new revenues.
Even before Covid-19, disruptive forces were reshaping the global banking landscape. Customers have high expectations, and have become accustomed to engaging online and through mobile services. Technology innovators have redefined what’s possible; customers now expect recommendations based on their personal data and previous behavior. Many believe that engaging with their bank should be as easy as buying a book or travel ticket.
Turn Data into Insights, Rewards
While a nimble, human approach and personal service may offset a technical shortcoming in the short run, it cannot offset a growing technology debt and lack of innovation. Data is becoming the universal driver of banking success. Community banks need to use data and analytics to find new opportunities.
Customer data, like spending habits, can be turned into business insights that empower banks to deliver services where and when they are most needed. Banks can also harness the power of data to anticipate customer life moments, such as a student loan, wedding or a home purchase.
Data can also drive a relevant reward program that improves the customer experience and increases the bank’s brand. Rewards reinforce desired customer behavior, boost loyalty and ultimately improve margins. For example, encouraging and rewarding additional debit transaction activity can drive fee income, while increasing core deposits improves lending margins.
The pandemic also highlights the primacy of digital transformation. With branches closed, banks need to find new ways to interact with customers. Digital services and digitalization allow customers to self-serve but also create opportunities to engage further, adding value with financial wellness products through upselling and cross-selling. In recent months, some community banks launched “video tellers” to offset closed branches. Although these features required investment, they are essential to drive new business and customers will expect these services to endure.
With the right digital infrastructure, possibilities are limited only by the imagination. But it’s useful to remember that today’s competitive advantage quickly becomes tomorrow’s banking baseline. Pre-pandemic, there was limited interest in online account opening; now it’s a crucial building block of an engaging digital experience. Banking has become a technology business — but technology works best with people. Community banks must invest in technologies to augment, deepen and expand profitable relationships.
Leverage Transformative Partnership
Technology driven transformation is never easy — but it’s a lot easier with an expert partner. With their loyal customers, trusted brands and their reputation for responsiveness, community banks start from a strong position, but they need to invest in a digital future. The right partner can help community banks transform to stay relevant, agile and profitable. Modern technologies can make banking more competitive and democratic to ensure community banks continue to compete with greater customer insights, relevant rewards programs and strong digital offerings.
When combined, these build on the customer service foundation at the core of community banking.
When the rapidly spreading COVID-19
virus forced CEO John Asbury to send most of Atlantic Union Bankshare Corp.’s 2,000
employees to work from home, it gave him the chills.
After all, the Richmond,
Virginia-based bank is hardly a digital-only enterprise. It has a branch-centric
strategy that emphasizes face-to-face customer service. And like most
traditional companies, it has lots of people working in big offices.
To Asbury’s immense relief,
everyone has quickly adapted to the demands of running a $17.6 billion institution
with a distributed workforce. “A month ago, it was quite
candidly terrifying, the notion of moving the company to a virtual status,” he says.
“But I have to tell you, at this point we’re actually pretty comfortable with
Ninety percent of Atlantic Union’s employees are now working from home, including Asbury and the bank’s senior management team.
As it turned out, working remotely
was not the only challenge that Asbury and the bank’s employees would find
themselves facing in the early days of the pandemic. Soon thereafter, a second challenge
came in the form of an opportunity that hardly anyone was ready for — not just
at Atlantic Union but throughout the banking industry.
The Small Business
Administration’s Payroll Protection Program, included in a $2.2 trillion
stimulus bill passed in late March, was designed to funnel $349 billion in
loans to hard hit small businesses that have been forced to close as part of a
broad nationwide lockdown intended to curb the virus’ spread. But almost no one
was prepared to take loan applications on the program’s April 3 start date,
least of all the SBA.
Many banks, including some of the country’s largest, were slow to engage because of their uncertainty about various details in the hastily rolled out program. Asbury, however, decided that Atlantic Union owed it to its small business customers in Virginia, North Carolina and Maryland to quickly embrace the program and help them get funded.
“I think we all feel the weight of
our responsibility,” Asbury says. “I never thought we would be an economic
first responder. I never thought we would be at the scene of the crash, and
here we are. You cannot say to your customers, ‘Sorry, it’s just too much work,’
or ‘Sorry, we just can’t go fast enough,’ or say, ‘Well, we’re going to do this
for a privileged few, because the others aren’t worth it.’”
And yet for all of Asbury’s determination to respond quickly, there were many problems that had to be solved along the way. For starters, the bank did not have the right technology to handle the large volume of loan applications that it expected to receive. It had recently licensed an automated workflow solution to build an online account opening system, but the bank’s new head of digital technology concluded that it wasn’t the right solution for account opening. Asbury says she quickly negotiated a credit with the vendor and chose a different technology instead.
“The team literally, in a matter of days, was able to repurpose the solution and stand up an online application web portaland an automated workflow system, which is essentially a virtual assembly line,” Asbury says. Many of the bank’s employees worked 12 hour days and weekends to have the system up and running by April 3. “To be able to build this automated assembly line … recognizing that everyone working on it is sitting in their homes, is unbelievable,” he adds.
Another challenge was the SBA’s
failure to provide lenders with a standard note agreement, one reason why some
large banks were slow to engage in program. If a bank doesn’t use the SBA’s
standard agreement, the agency won’t guarantee the loans. Asbury decided the
bank couldn’t afford to wait for the SBA to resolve that issue, so he took a
risk. “We used our best educated guess to create our own note, in the spirit of
the agreement, and we began to fund,” he says. The agency later said it was
okay for banks to use their own note agreements.
Once Atlantic Union began submitting loan applications, the SBA’s “E-Tran” electronic loan processing system kept crashing under the torrent of submissions it was receiving from lenders throughout the industry. The bank had 30 people who manually keyed in data, and is implementing automated technology to import the application data and upload it into the E-Tran system, which will greatly shorten the application process. “We think we can get the cycle time down to one minute for one loan, and that’s really important,” Asbury says.
The bank had 400 employees working full time on the program, including Asbury’s own administrative assistant who was approving loans. Through April 15, 5,717 Atlantic Union customers had been approved for loans totaling $1.42 billion. The program is now out of funds, although the bank has decided to continue accepting application in the hope that Congress will provide additional funding.
The pandemic proved to Atlantic Union that it is both resilient and innovative, traits that will benefit it long after the COVID-19 crisis has passed. “It’s going to cause us to be more courageous,” Asbury says. “I don’t mean we’re going to be hasty [or] impulsive, but I think that we’re going to be able to make big decisions more confidently, and frankly quicker as we’ve proven we can do it.”
In today’s fast-moving world, business leaders expect quick decisions, and forward-thinking banks are speeding up the loan process to serve clients in less than three minutes. So what’s changed — and what hasn’t changed — in commercial lending? In this video, Bill Phelan of PayNet explains that relationships still drive business banking and shares how the development of those relationships has changed. He also provides an update on Main Street credit trends.
Since opening her Brooklyn-based gym, HIIT Box, four years ago, Maryam Zadeh has been featured for her fitness expertise in publications like Marie Claire magazine and Self.com. This exposure has caused business to explode.
The number of clients and revenue have tripled, she says. HIIT Box has relocated three times in four years to pursue more space. And there’s still a waitlist to join.
But despite this success, Zadeh has struggled to obtain the capital she needs to keep up with the rapid growth of her business. She initially invested her own money—a $13,000 inheritance—and later obtained $35,000 from American Express (her payment processor, through its working capital program) and two smaller loans totaling $27,000 from the online lending platform Biz2Credit.
But it wasn’t enough, and other lenders turned her down when she sought additional capital to move into a bigger space. So, she turned to customers to fill the funding gap, offering her 40 largest clients a discount if they paid a lump sum up front. Twenty-three clients took advantage of her offer. “That’s what gave us that big chunk of money [for] construction, because no lender would give it to us,” says Zadeh.
Growing pains like these are common among female entrepreneurs.
Women own more than 11 million businesses in the U.S., or 39 percent of businesses, according to a 2017 study commissioned by American Express—a number that has risen over the past 2 decades. A Bank of America survey published last year found that 56 percent of female entrepreneurs plan to grow their business over the next five years. To do so, however, many of them will need to raise capital.
“Women-owned firms face persistent funding gaps and funding source mismatches,” according to a study published in 2016 by the Federal Reserve Banks of New York and Kansas City. Twenty-eight percent of women-owned firms applying for a loan over the previous year were not approved for any funds, and 64 percent obtained less money than they needed.
Some banks have developed educational programs to better engage this potentially lucrative demographic.
Renasant Bank, based in Tupelo, Mississippi, launched its “Nest” program in March, which provides financial education to female entrepreneurs. It’s part of a larger bank-wide program focused on developing female leaders, both in the community and within the bank.
Tracey Morant Adams, the chief community development and corporate social responsibility officer at the $13 billion asset bank, saw that female entrepreneurs often weren’t as comfortable discussing the financial position of their business. They also didn’t understand the financing options available to them and were more likely to rely on personal wealth—dipping into their retirement savings, for example—to fund their small business.
Renasant will use a lunch-and-learn format to explain financial basics—how to read pro forma financial statements, for example—so women can gain the confidence and knowledge they need to understand their financial position. Renasant will also explain the funding solutions available, and how to understand which one is the best fit for their business—when a line of credit is more appropriate than a credit card, for instance.
Ultimately, at least in theory, some of these women will seek a loan or deepen their relationship with the bank. “You have to be intentional and deliberate in your efforts to reach out and find that business,” says Adams. “The Nest is going to allow us to be more intentional, particularly in that female space.”
Bank of America’s study asked female entrepreneurs to identify solutions to address the funding gap women face. Twenty-four percent pointed to education—echoing the importance of programs like Renasant’s.
But even more women—42 percent—pointed to the need for gender-blind financing to reduce the role that unconscious bias—and outright sexism—play in the loan application process.
When she’s applied for capital, Zadeh—the CEO and sole founder of her company—has been asked where her (male) partner is. Some have assumed she was running a yoga studio, not a gym. She’s even been asked if she can do push-ups. (She can.)
Women—and small business owners in general—are more likely to be approved for a business loan by a small bank than any other option, according to the Fed. But despite higher approval rates at small banks, women are more likely to seek funding from a large bank or online lender.
Stories like Zadeh’s may explain what’s driving women to online lenders and larger banks. “Everything is driven by the data, and there is no possibility of any kind of gender bias,” says Rob Rosenblatt, the head of lending for the online lending platform Kabbage.
Applying online, in theory, reduces bias, so a female applicant could be more optimistic that her loan would be approved.
For women seeking to grow their businesses, access to capital can make a big difference—and expand lending opportunities for the banks that enhance their efforts to this group.
Traditional processes for underwriting and originating small business loans can be expensive and onerous for the typical financial institution, making it difficult to make these loans profitable. But Stuart, Florida-based Seacoast National Bank—through its partnership with SmartBiz, based in San Francisco—is already experiencing significant growth in SBA loan volume by automating the process and accessing a nationwide pool of prospective customers. In fact, the $5.9 billion asset bank plans to crack the Small Business Administration’s list of the top 100 SBA lenders by the end of this year.
It’s hard to argue with the results so far: Data from the SBA reveals the bank’s average number of loan approvals for 2018—43 per quarter as of June 22—are almost equal to the total number of SBA loans the bank approved (46) in all of 2017. Of the 129 SBA loans approved by Seacoast so far this year, almost 100 were generated through SmartBiz, according to the bank. SBA loan volume is at $33.9 million so far for the year—more than double the amount approved by the bank last year.
Seacoast started working with SmartBiz about a year ago, due to its interest in the fintech firm’s ability to provide access to a broad, national base of potential customers, says Julie Kleffel, executive vice president and community banking executive at Seacoast.
Eight banks currently participate in SmartBiz’s loan marketplace. Each bank outlines its credit policies and desired customer criteria with SmartBiz, which allows it to serve as a matchmaker of sorts between customer and lender. “We’re able to send the right borrowers to the right bank,” says SmartBiz CEO Evan Singer. Roughly 90 percent of the customers matched to the company’s partner banks are ultimately approved and funded, which benefits both the customer and the bank, which is less likely to waste time and resources underwriting a loan that it ultimately won’t approve.
Seacoast’s underwriters have the final say on whether the loan is approved, and they close the loan, says Kleffel. The guaranteed portion of the loan is sold on the secondary market, with Seacoast keeping the unguaranteed portion. (Under the SBA 7(a) loan program, the SBA pays off the federally guaranteed portion if the loan defaults.)
Kleffel says the two entities have a “collaborative” relationship and spent time early on learning how the other does business. Together, “we provided a way to better serve both our existing clients as well as new clients [SmartBiz is] introducing us to,” she says.
Seacoast currently ranks 108th on the SBA’s list of top lenders, putting the top 100 within sight. Access to more customers through SmartBiz has contributed to the bank’s SBA loan growth, but a more efficient process means the bank can handle the increased volume. The traditional 30- to 45-day process has been cut to 11 or 12 days, according to Kleffel. Ultimately, the bank would like to approve SBA loans within 10 days of submission.
Singer credits Seacoast for making the most of the partnership. “The leadership at the bank has really embraced innovation, and you can see what they’re doing out in the marketplace to meet customer needs,” he says, adding that the experienced SBA team the bank has in place is another key differentiator.
Seacoast aims to treat these new customers just as well as the customers it would attract more traditionally through its Florida branches. Each new customer receives a call from a Seacoast banker, introducing them to the bank. The same banker “works directly with them all the way through closing and post-closing, so that they’re appropriately brought into the Seacoast family with the same level of care” as any other customer, says Kleffel, with an eye to retaining and growing the relationship.
Seacoast has accomplished this growth without hiring new staff. SBA loan origination is currently supported by just five employees, including a department manager. Supporting that level of loan volume and growth would require double that without SmartBiz on board. The partnership, Kleffel says, “has allowed us to pull through more revenue, faster, with [fewer] people and a better customer experience.”
While Citizens Bank and Fundation are certainly not the first bank and fintech company to work collaboratively together, theirs is unlike any other, both parties say, because of the relationship that exists between the two organizations.
Providence, Rhode Island-based Citizens, a top-20 U.S. bank at $152 billion in assets, partnered with Fundation, a fintech firm in Reston, Virginia that focuses on credit delivery to improve the efficiency and turnaround time for small business loans under $150,000.
Fundation’s technology serves as the entire front end, essentially a white-labeled online application, for Citizens’ commercial lending line of products, providing a technology platform that includes underwriting, closing and engagement tools, and features a decision engine that, based on certain criteria, determines “up front” which loan goes to Citizens and which to Fundation, according to Jack Murphy, president of the business banking division at Citizens.
“What makes the partnership unique is there’s a fair amount of folks in this space who outsource this type of lending to the partner,” Murphy said. Instead, the application process is integrated into Citizens’ own digital platform, a top priority for the bank, Murphy said.
“We wanted to integrate (it) into our technology.”
Citizens and Fundation won Bank Director’s Best of FinXTech Partnership award, presented May 10 at the FinXTech Annual Summit, held at The Phoenician resort in Scottsdale, Arizona.
The platform allows for an entirely electronic application process, and enables Citizens’ lending team to physically go to and visit its small business customers to start or complete that application. Customers can also begin the application process in a branch, and finish at home, “or in their car,” Murphy joked, though he doesn’t advocate driving and applying for a commercial loan at the same time.
“It’s really become the front-end to our core underwriting system,” Murphy said.
Fundation has multiple bank clients, but its credit delivery platform uses data and a decision engine to automate much of the decision-making framework that many banks have and still use when reviewing applications. It also simplifies the compliance assessment, including the Customer Due Diligence (CDD) final rule that was developed just two years ago and became effective in May 2018.
There is automated scoring in approving small loans, allowing Citizens to focus its human capital on other strategies, like bigger, more intensive applications and projects that need more careful review while also reducing paperwork that can be cumbersome. It also has in some ways upended the entire underwriting process—they use bank statements instead of financial statements as part of the application process, and the technology determines which loan goes to the bank and which goes to the partner automatically up front.
The technology has only been available to all customers since the end of March 2018, but getting to that point involved months of due diligence, whittling down a list of nearly two dozen other firms before ultimately selecting Fundation. “We took about a year to research who might be the best partner for us,” Murphy said, noting that it all began with the goal of improving the customer experience through a digital platform.
The board considered whether to buy, build or partner with a fintech, but ultimately there was only one choice. “The fintechs have not had the balance sheets or cost of funds or the customer bases that the banks have, so partnership is really the best way for the two companies to business,” Murphy said.
Culture and cohesion between the two companies was half the driving force behind the decision to choose Fundation, Murphy said, in a crowded and competitive fintech market. Murphy said they wanted to partner with somebody who was “not just a tech company,” but a “partner that has a similar vision.”
Like other banks, Citizens has several relationships with fintech companies which provide other services, like SigFig, for instance, a tech-based personal investment platform. But Fundation offered something that was new to the bank, and has in just a short time already proven its worth.
It’s shortened the time from application to credit delivery to as little as three days, which in previous generations could have taken weeks, and generated “many multiples” of increased demand since a series of pilots with the software last fall.
The transformation of this credit delivery, he said, is far more than what some banks have done, which Murphy described rudimentarily as simply taking a paper-based loan application and converting it to an online webform. “That’s not digital,” Murphy said. “Digital is literally the entire experience being electronic.”
Citizens wanted to make its application process fully digital, Murphy said, which has reduced costs and improved efficiency for the bank. And that result has not only transformed the bank’s commercial lending process, but how it strategizes its future.
“This is for us, I would say step one in a journey of multiple products and multiple ways of making it easier to do business with the bank, not vice versa,” Murphy said.
The cultural and philosophical divides between banks and fintech companies is still very apparent, but the two groups have generally come to agree that it’s far more lucrative to establish positive relationships that benefit each, as well as their customers, than face off on opposite ends of the business landscape.
The benefits of collaboration in the fintech space, which manifest themselves in the form of improved efficiency and profitability, has led to a growing number of partnerships between banks and fintech firms. This year Bank Director and FinXTech selected 10 finalists in three categories—Best of FinXTech Partnership, Startup Innovation and Innovative Solution of the year—for its annual Best of FinXTech awards. The three category winners highlight some of the most transformative and successful partnerships between banks and fintechs that have improved operations, experience and profitability for both.
The awards were presented at Bank Director’s FinXTech Annual Summit, held May 10-11 at the Phoenician resort in Scottsdale, Arizona.
Radius Bank and Alloy
Radius, an $1.1 billion asset bank headquartered in Boston, has been on a dedicated track to become an online-only retail bank since Mike Butler took over as CEO about 10 years ago. But Butler and his executive team knew that Radius’ customer acquisition and onboarding process was inefficient. The demand was there, but the bank’s internal onboarding processes couldn’t keep up, and the attrition rate was high.
Overhauling that process led Radius to Brooklyn, New York-based Alloy, a firm still in its relative infancy. Butler and the Radius board of directors knew that this was a risky play because Alloy was still a young startup company and they would be entrusting it to digitize its customer onboarding process, a critical move that aimed to make the process more efficient and reduce drop-offs. The bank had to bring together several departments, from data to marketing, and get them all on the same page.
It had to be just right to make their model succeed—and so far it has worked. The bank has reduced its technology cost to open an account by 50 percent, and seen a 30 percent increase in its application conversion rate. Radius also has seen a steep downward trend in fraudulent account openings, an issue that’s become increasingly prevalent with online banking.
But even with significant technology investments and improvements, there was still considerable human productivity invested in some of the bank’s core functions. Some 30 to 40 of every 100 incoming retail account applications were being tapped for manual review. With some 1,000 applications coming in each week on average, the calculus there is pretty clear about the expense the bank faced with reviewing those applications. Alloy’s technology automates much of the review process using decision engines, and has reduced that manual review by 98 percent.
Alloy’s technology automates most of the process and has reduced dropped applications on the consumer side and the human capital expense for the bank. Now, just three or four of every 100 applications on average are pinged for manual review.
Most Innovative Solution of the Year:
CBW Bank and Yantra Financial Technologies
Who would have thought a former Lehman Brothers executive and her husband with a technology pedigree that includes a stop at Google would somehow elevate a tiny bank and fintech firm in rural Kansas to national prominence?
While maybe not a possibility completely in the left-field bleachers, the partnership between CBW Bank and Yantra Financial Technologies has drawn significant attention from both the banking industry and the tech world. Suresh Ramamurthi, the CEO of Yantra and chief technology officer for the bank, and his wife, Suchitra Padmanabhan, the president and CEO of CBW, together turned the near-failing bank around after they purchased it in 2009, mostly with personal savings.
The bank, with just $33 million in assets, has maintained is rural core deposit base in the tiny town of Weir, but also launched a revolutionary global marketplace for some 500 application programming interfaces, or APIs, that enable tech firms and other companies, like those in the health care space, to experiment with finding efficiencies and maintain compliance at the same time.
Using Ramamurthi’s technological expertise, the bank developed the APIs whose application can range from developing new products that are compliant with regulatory requirements to helping the institution or fintech scale up their operations, or simply improving the bank’s core operating system.
The APIs were also applied to CBW’s own digital banking platform, which has drawn nationwide clients, including popular fintech firms like Moven and Simple, as well as companies in the health care industry.
The bank then published the APIs publicly, working with Yantra in the Y-Labs Marketplace. Common APIs results in streamlined interoperability, like a payments solution, for example, between multiple businesses in multiple industries. More than 100 companies have signed up with the Marketplace to use the APIs, including other fintechs and companies outside of financial services.
It has also allowed the bank to enhance its own digital offerings, which Ramamurthi says will result in a new app later this year that will reshape how mobile banking works.
Best of FinXTech Partnership:
Citizens Financial Group and Fundation
For two decades, Citizens Financial made business banking loans using a manual process that was heavy on the paper. But this is an extremely inefficient way of doing business and the bank’s leaders wanted a faster and less costly way of underwriting loans, particularly with new fintech marketplace lenders coming into the market—whose technology gave them a big competitive advantage.
Providence, Rhode Island-based Citizens, one of the country’s top-20 banks at $152 billion in assets, worked with Fundation, a Reston, Virginia-based credit solution provider, to reinvent how it makes small business loans, rolling out in March a new credit delivery process for small-business loans and lines of credit up to $150,000.
“This is the future,” says Jack Murphy, president of Business Banking at Citizens. The new system has automated nearly all of the decision-making for the bank, which Murphy says makes it easier on both bankers and customers alike. Bankers aren’t spending hours reviewing applications, and customers can complete the application on their own time, even in the car, Murphy jokes. The bank still controls the credit policy, which ultimately determines if a manual review is necessary.
But the partnership didn’t come about overnight, and took many months of due diligence and conventional vetting before it was finalized. The bank took a deliberate approach to ensure it was making a good decision.
“There’s not a bank today that’s not thinking about fintech and what are the right ways to go about executing a strategy around digital technology,” Murphy says.
The following partnerships were also recognized among finalists for the three top awards: