The Huge Lending Opportunity You’re Overlooking

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entrepreneur-4-12-19.pngSince 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. Twitter_Logo_Blue.png But despite higher approval rates at small banks, women are more likely to seek funding from a large bank or online lender.

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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.

A Community Bank’s Pursuit of Coast-to-Coast SBA Lending

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lending-7-11-18.pngTraditional 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.”

Citizens Bank and Fundation Mobilize Credit Delivery

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partnership-5-16-18.pngWhile 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.

Winners Announced for Bank Director’s 2018 Best of FinXTech Awards

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awards-5-10-18.pngThe 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.

Startup Innovation:

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.

Finalists

The following partnerships were also recognized among finalists for the three top awards:

  • MVB Financial Corp. and BillGO
  • TCF Bank and D3 Banking Technology
  • U.S. Bank and SpringFour, Inc.
  • USAA and Clinc
  • Seacoast Bank and SmartBiz Loans
  • ChoiceOne Bank and Autobooks
  • Pinnacle Financial Partners and Built

Small Business Lending: A Case for Digital Improvement

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lending-1-3-18.pngIn a world where we can summon a car to pick us up in five minutes, and pizzas are delivered by drones, banks are being challenged by small business owners to create a secure digital environment to meet all of their customers’ banking needs—including applying for a loan—at their convenience.

Banks today have a great opportunity for digital improvement in the area of lending. For example, in traditional small business lending, the administrative and overhead costs to underwrite a $50,000 loan and a $1 million loan are essentially the same. With the aid of technology, underwriting costs are greatly reduced through a more efficient process.

In addition to reducing the cost to generate a loan, another direct benefit is the reduction in time for both the borrower and bank staff. Banks that implement technology that allows new and existing customers to apply for a small business loan online can reduce end-to-end time for both the borrower and the lender. The borrower can apply for the loan, upload documents and receive all closing documents digitally. If the online borrower has questions, the customer is assigned to a lender who can provide help through the process via phone, email or even in person, if needed. As an added benefit, the banker can focus on the customer in front of him and can start an application in the branch for the borrower, who then can finish the application in their home or office.

We now live in an era where user experience is at the front and center of everything a company does, and a painful process or poor user experience means that a prospective borrower may go elsewhere to apply for a loan. Banks that embrace digital lending technology today can differentiate themselves by delivering exceptional customer service. In addition to reducing costs and streamlining the process, lenders and borrowers can see several additional advantages to a digital experience.

Borrowers complete the application in less time.
Technology is transforming the way banks can accept applications, and can provide borrowers with a secure application that can be completed anywhere on any device, including with their banker in a branch or online.

Documents are managed securely.
Digital lending technology is advantageous because it also enables the borrower to deliver important documents to the lender quickly and securely. Instead of the lender waiting for physical copies, borrowers can upload documents to a secure portal, helping to shorten the process.

A more efficient process increases customer satisfaction.
Paper-based applications take a lot of time to fill out, and can create frustration for the borrower and the lender if a section is missed. The more efficient the lending process is, the greater the borrower satisfaction rate will be—allowing your team to build better and larger relationships.

From slim interest rate margins to competitive alternative lenders, many financial institutions are facing pressure to find a way to make lending profitable again. Leveraging technology to streamline the loan process and improve the borrower experience will lead to increased profitability for financial institutions, which is possible today with the help of technology.

Seven Costly Mistakes Banks Make With Their Small Business Loan Applications

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lending-10-30-17.pngAll aspects of banking are going through a remarkable technological evolution. Customers are clamoring for all things digital, from making deposits to easily paying the babysitter. Small business owners are not immune. They are now starting to demand that their bank embrace technology after seeing the benefits that come from an accessible, digitized lending experience online, thanks in part to the technology being utilized by modern banks and alternative lenders.

Here are seven costly mistakes banks make with their current loan applications:

1. Your loan application process takes too much time.
Does this sound familiar? Your potential borrower drives to a branch to pick up a paper application, fills it in, realizes he or she doesn’t have all the information and leaves the bank, returning the application to the branch days or weeks later. Your team looks it over, and there are still missing documents, so the whole process from beginning to end can take weeks and sometimes months.

It’s a universal struggle in lending. With the correct technology, the documents your staff needs can be uploaded easily online, automatic reminders can be sent to the borrower for missing documents, and when terms are offered the technology will automatically request the documents your bankers need. It’s amazing how much time technology can and will save your team.

2. Your applications are still only on paper.
It’s a risky business when your prospective borrower goes to your website to apply for a loan only to be met with a prompt to “contact us to apply.” Your most eager customers will call but who knows where everyone else will go? Are you losing business to alternative lenders? That’s a possibility.

3. You need to reduce the workload for your team.
Let’s be honest. Your staff wears many hats in today’s modern bank branch. More and more branch managers are having to chase after documents for small business loans. Take the burden off the team and let technology do the hard work. Look for technology to utilize automation to request missing documents via a secure portal and let your managers get back to what really matters: providing great customer service.

4. Your bank needs to conform to the Americans with Disabilities Act (ADA).
Is your current application accessible to the blind or those who have low vision? An interactive pdf that your borrower can fill out and send via email will no longer be acceptable as those forms are often not accessible to blind people who use screen readers. Your bank needs technology that has created software that exceeds current standards and requirements for accessibility.

5. Reporting and analytics take too much time.
You and your team need a transparent workflow. When your team has the analytics and the ability to track how many people are viewing, starting, and completing your application, your team can do a better job of forecasting the week ahead along with creating targeted marketing campaigns.

6. Your bank struggles with data.
Creating, storing, and using data will become more and more important as new regulations are created. Use technology to your advantage and gain a significant competitive edge through automatic reminders to complete applications and the ability to gather data for retarget marketing.

In addition, reduce risk and time spent rekeying information by having a central location for data. Your goal should be to have the borrower enter their information when they are ready. No longer would your staff have to waste valuable time rekeying information from paper.

7. Communication within the bank is less than stellar.
You are ready to make internal collaboration easier and knowing where each loan is in the process gives visibility so everyone on your team can stay on track and know what’s coming their way, helping facilitate cross departmental communication to accelerate the loan’s end-to-end time.

Increased efficiency, profitability, productivity and enhanced customer experience are all reasons why digitizing your loan application should be a top priority for next year. For example, in most banks, the administrative and overhead costs to underwrite a $50,000 loan and a $1 million loan are essentially the same, making $50,00 loans less attractive to the bank. Simplifying the process and achieving greater efficiency may grow your loan volume as well. It’s time to make the shift from traditional applications and revolutionize the lending experience for your borrower.

A Buyers Guide to Small Business Lending Software

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lending-8-7-17.pngIs digitizing your small business lending a priority for your bank? Increased efficiency, profitability, productivity and enhanced customer experience are all reasons why it should be. For example, in most banks the administrative and overhead costs to underwrite a $50,000 loan and a $1 million loan are essentially the same. Wouldn’t it be great to free up your team to focus on the most important thing—the customer—and let the technology take of the rest?

Here are nine questions to ask when you start talking to fintech companies that sell small business lending software:

  1. Is the software able to conform to Americans with Disabilities Act (ADA) standards and best practices? According to the American Bankers Association there have been over 244 federal lawsuits since 2015 that have been filed alleging that people with disabilities are denied access to online goods and services in violation of ADA. The Department of Justice, the agency charged with ADA enforcement, has delayed website accessibility regulations until 2018, but can your bank really afford to wait?
  2. Does it improve the borrower and banker experience? It’s not enough to digitize your applications. What your small business lending software must do is improve your current process for everyone by offering a well thought-out and well-designed user experience that’s intuitive, reduces end-to-end time and helps increase profits.
  3. Will it use your bank’s credit policy? Black box credit policies should be a thing of the past but they still show up in loan origination software. Find a technology that respects the bank’s risk profile and reflects its credit criteria and corporate values.
  4. Does it offer an omnichannel application and borrower portal? Borrowers want the ability to start and finish an application on your website any time of day or night, either on their own or with the help of their banker. Look for a technology that doesn’t eliminate the banker-client relationship, but rather, enhances it.
  5. How quickly will it fit in with your current workflow? The goal should be a quick and seamless transition from paper to digital, but sometimes there isn’t a straight line. Perhaps your financial institution desires the ability to digitize the application process but still wants to manually control the underwriting and spreading process. Look for a platform that has the ability to grow with your workflow and is designed in a way that accommodates your approach to using technology.
  6. Are they a partner or a competitor? More and more alternative lenders are starting to see a benefit in partnering with banks. But will you find out later that your ‘partner’ is competing in your own back yard for the same loans you are trying to acquire through them. Find a platform that’s in the business of helping banks, not replacing them.
  7. Does the platform provide actionable analytics? The platform’s analytics must be able to provide banks with insight into their loan program that is almost impossible to track manually. Find a platform that truly maximizes the data collected by, or generated from, the technology to provide rich analytics like pipeline management, process tracking, customer experience feedback and exception tracking. This will enable managers to manage better, sales people to sell more effectively and customers to be more fully served.
  8. What are the fraud detection and prevention resources used to keep you and your customers safe? As your bank offers more digital options, criminals will devise more sophisticated and hard-to-detect fraud methods. Your bank should only seek a technology partner that has security at the top of its priority list.
  9. Will it be easier for borrowers to complete applications, and for bankers to decide on and process applications accurately and efficiently? The goal for most banks wanting to implement a small business loan origination platform is to reduce end-to-end time, increase profits and give both customers and its own staff a better experience. Make sure the software is designed with this in mind. It should be simple and intuitive for perspective borrowers to use, and it should lessen the time bankers have to touch the loan, freeing up both front and back office teams to maximize their productivity.

Your institution is unique, so you’ll need to find a technology partner that celebrates that individuality rather than changes it. Use these questions as a foundation from which you can fully explore all of your options and find the partner that will bring you the most value.

The Long Drought in Small Business Lending

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business-lending-8-4.png

Most Americans have moved on from the financial shocks that struck our economy almost a decade ago. Millions of new jobs have been created, wages are rising and companies have repaired their balance sheets. Yet one unfortunate legacy of the 2008 to 2010 meltdown remains: the tens of thousands of small businesses that still struggle to obtain a bank loan at reasonable cost, if at all.

A new studyby three Harvard Business School economists provides fresh insights into the pullback in small business lending, and its consequences. The researchers found that the nation’s four largest banks— Bank of America Corp., Citigroup, JPMorgan Chase & Co., and Wells Fargo & Co.—not only cut back more sharply than other lenders during the recession, but also showed far less interest in regaining lost ground as the economy picked up again.

According to the Harvard study, the four banks’ advances to small businesses hovered at only half of pre-crisis levels until 2014, even as rivals pushed up their lending to almost 80 percent of pre-crisis levels. All in all, lending by the big four was 30 percent lower than other banks included in a Community Reinvestment Act database.

The lending drought has its origins in the big banks’ decision to focus on other, less risky sectors during the financial crisis. Among other drawbacks, small business loans carried higher capital requirements, and were hampered by inefficient automation of underwriting processes. Once the recession was over, the big four banks were constrained by stifling new regulations imposed by the 2010 Dodd-Frank Act and by the Federal Reserve, notably a large uptick in risk weightings for small business loans.

The pros and cons of the banks’ actions will be debated for years to come. What is beyond dispute is their painful consequences. A county-by-county examination by the Harvard researchers shows that in areas where the big four pulled back, business expansion slowed and job growth suffered, especially in communities where small businesses played an outsized role. Wages also grew more slowly. All these impacts were felt most strongly in sectors most dependent on outside funding, such as manufacturing.

The Harvard study acknowledges that other lenders, including an array of shadow bank start-ups, including online lenders, have largely filled the gaps left by the Big Four. Nonetheless, the cost of credit remains unusually high in the worst-affected areas and, while jobs have returned, wages continue to lag. “Our findings suggest that a large credit supply shock from a subset of lenders can have surprisingly long-lived effects on real activity,” the study concludes. It adds that “the cumulative effect of these factors could explain some of the reason why this recovery has been so weak compared to others in the post-war period.”

These findings are confirmed by the recent performance of the Thomson Reuters-PayNet small business lending index, which measures the volume of new commercial loans and leases to small businesses. Apart from a brief uptick after last November’s election, lending has been stuck in the doldrums for several years. The index has fallen, year-over-year, for 12 of the past 13 months. With a shortage of credit compounded by economic and political uncertainties, many small business owners remain reluctant to invest in new plant and equipment.

We at PayNet estimate that the small business credit gap costs the U.S. economy $108 billion in lost output and over 400,000 jobs a year. Some firms are forced to put operations on hold for two or three months while they wait for a bank to process their credit application.

According to our count, a typical commercial and industrial loan requires 28 separate tasks by the lending bank. It involves three departments— relationship manager, credit analyst, and credit committee—and takes between two and eight weeks to complete. The cost of processing each credit application runs at $4,000 to $6,000. The result? Few banks are able to turn a profit on this business unless the loan size exceeds $500,000, which is far more than most small businesses borrow. The time, paperwork and cost involved are pushing more and more small businesses away from traditional financing sources. We cannot allow such a key sector of our economy to fight with one hand behind its back. Lenders need to be more accepting of new kinds of financial data and fresh approaches to credit standards. Regulators must open the door to more innovative underwriting techniques and assessment processes.

A good place to start would be to examine what has gone wrong over the past decade. As the Harvard study puts it: “Going forward, it will be useful to better disentangle the causes of this shock. If regulation played an important role…then understanding the specific rules that contributed the most would be helpful from a policy perspective.”

Why Your Bank Should Be Watching Amazon

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amazon-7-7-17.pngCould Amazon be a threat to banks? The online retailer announced in June that its Amazon Lending program, a small-business loan service that the company began offering in 2011, had surpassed $3 billion in loans globally, to more than 20,000 small businesses. One-third of those loans—$1 billion—were created in the past year, making it larger than most small banks.

Competition from nonbanks in small business lending isn’t new. But while lending startups in the past have often excelled in technology, they struggled to gain customers, and funding was more expensive than for traditional banks. In contrast, banks have had the expertise and relationships, and can fund loans more cheaply.

Amazon’s loan growth may represent a new phase in loan disruption, according to Karen Mills, a senior fellow at Harvard Business School and former head of the U.S. Small Business Administration.

“Having a pipeline into a set of small business owners who are doing business with the platform, knowing a lot of data about their business, could very well be the equivalent of a customer pipeline that’s unparalleled except at some of the most important traditional banks,” Mills says.

Amazon isn’t putting banks out of business, at least not in the foreseeable future. While 20,000 small businesses and $3 billion in loans is nothing to sneeze at, the program is invitation-only and limited to Amazon sellers, with the company leveraging its data on its client businesses to make credit decisions.

“Amazon looks at everything as basically a use case,” says Steve Williams, a partner at Cornerstone Advisors, based in Scottsdale, Arizona. “Is it something that we can do that the customer would want, can we technically deliver it, and can we make a business out of it?”

Banks should prepare for a reality, led by companies such as Amazon, where customers expect rapid credit decisions and an easy loan process. An employee describes the lending process as “three fields and three clicks” in a video published by Amazon in 2014.

“You can’t waste your customer’s time, and Amazon is relentless in trying to make things easier for its partners and customers,” says Dan O’Malley, the chief executive officer at Boston-based Numerated Growth Technologies, which spun off from Eastern Bank’s lab unit in May. That unit developed an express business loan program for the bank, and banks can now license the lending platform through Numerated.

Mills recommends that banks examine whether they want to grow their small business lending portfolio and if so, examine if they can provide the platform in-house or need to use an outside company.

Banks have been increasingly partnering with fintech firms, but Amazon’s suitability as a partner is debatable: O’Malley says Amazon is notoriously difficult to work with. But Amazon seems open to relationships of convenience. JPMorgan Chase & Co. offers an Amazon Prime Rewards Visa credit card, which gives 5 percent cash back to Amazon Prime members on their Amazon.com purchases. BBVA Compass has been testing the Amazon Locker program in its Austin, Texas, branches, so Amazon customers can safely and conveniently pick up their orders. Presumably, this would drive more traffic to BBVA’s branches.

And there’s Alexa, Amazon’s voice-operated digital assistant, which is used in Internet-enabled speakers such as the Echo. So far, Capital One Financial Corp. and American Express are among the few financial institutions whose customers can use Alexa for tasks like making a credit card payment or getting details on spending.

Amazon sees promise in its voice-enabled devices. “We’re doubling down on that investment,” Chief Financial Officer Brian Olsavsky said in Amazon’s first quarter 2017 earnings call. With the Echo, Dot and Tap products, Amazon has about 70 percent of the smart speaker market cornered, according to TechCrunch.

“Voice commerce and having to deal with voice as a channel is an important thing that [banks] are going to have to figure out,” says James Wester, the research director responsible for the global payments practice at IDC Financial Insights.

Amazon likely doesn’t have its sights set on becoming a bank—at least not for now, says Wester. But the company’s customer-first approach to improving processes is setting the tone for commerce, and if Amazon thinks it can make life easier for its customers and make money doing it, it won’t shy away from competing with the banking industry.

The possibilities are endless. Amazon unveiled its Amazon Vehicles webpage as a research tool for consumers in 2016, and the retailer is gearing up to sell cars online in Europe, according to Reuters. “There’s no reason that people won’t say, ‘I’m going to buy my car through Amazon and finance it,’” says Cornerstone’s Williams. Auto loans may very well be the next financial product on Amazon’s radar, and then, what’s next?

Eating Soup with a Fork: Why Banks Struggle with Small Business Lending, and How to Fix It

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For most regional and community banks, the old-fashioned business of making loans remains their most important source of revenue. And for most of these banks, small businesses are a big part of their customer base. Yet they struggle to lend to small businesses profitably.

You’ve probably heard the statistics before: Small businesses represent about half of all U.S. employment and about 40 percent of private sector GDP, according to the U.S. Small Business Administration, and yet they only get around 21 percent of commercial bank credit. Nearly half of all small businesses sought some kind of loan in 2015, according to the Federal Reserve Bank of New York (the last year for which we have broad data from Fed surveys), so the demand is there. What’s going on here?

As anyone who is familiar with lending to small business can tell you, it has traditionally been extremely difficult to measure and manage small business credit risk in a cost-effective way. Current legacy methods either expose the bank to too much risk or incur so much cost that small business loans can’t be made profitably. Hence, banks are unwilling to deploy capital to small businesses on the same scale they do to consumers or large commercial entities.

The False Dichotomy of “Consumer” and “Commercial”
The difficulty that banks experience trying to make loans to small businesses is like trying to eat soup with a fork.

Let me explain.

When it comes to lending, most banks still see the world falling into one of two categories: “consumer” or “commercial.” Consumer lending is a highly-standardized process while commercial is a highly bespoke one.

The consumer process gains its efficiency by ignoring the positive attributes every small business has, such as cash flow, and primarily relies on the small business owner’s credit score to assess risk. This generally means that the lender is not getting an accurate read on capacity and risk, and therefore is very likely to either take too much risk or turn away a lot of potentially good business.

The commercial process, on the other hand, gains its reliability by taking a far more diligent approach. It requires a heavy dose of manual credit analysis done by highly trained (and well compensated) professionals. Lenders expend significant time and resources gathering information, spreading financials, reviewing collateral and analyzing many aspects of each business to a degree that a small request—say for $25,000—is treated much the same way as a larger $750,000 request.

The Right Tools for the Job
Small businesses are a different category of customer. Most have a mix of consumer and commercial attributes. To underwrite them effectively and profitably requires marrying some of the efficiency of the consumer process with some of the underwriting capabilities of the commercial process. Either one alone will fail.

If your only choice is a fork when eating soup, the experience is going to be so frustrating you’ll likely give up.

But what if you had a spoon?

Here’s what a small-business-lending spoon looks like:

First, it enables online originations to reduce the dependency on expensive bankers for small loan requests.

Second, it provides the flexibility to use better small business underwriting information such as real time operating cash flow versus dated tax statements or just the owner’s credit score. For example, reviewing the past 60-90 days of bank transactions is more indicative of the credit worthiness of a restaurant than the information in a dated document or a lagged credit bureau score.

Third, it supports automation to manage every step of the application process as well as the subsequent servicing and monitoring of the loan. As an example, bankers today will process loans sequentially without regard for incoming credit quality or loan size. How much more efficient would it be if loan requests where categorized into “likely approval,” “likely decline” and “needs review” before a banker received them? The power of a speedy decline would eliminate a significant amount of wasted time and effort.

As a former banker and experienced tech entrepreneur, I have been fortunate enough to witness and even play a role in forging some of the early “spoons” that have helped transform this market. So far, however, most of the pioneering work here has happened outside banks.

What Bank Can Do
Small business lending will not be solved by building more branches, or spending more money on training and marketing. Banks must expand their technology tool set, especially when originating small business loans.

So how does a bank introduce new technology without it costing millions of dollars and years of effort?

A bank must look to the new breed of bank-friendly technology companies for help. Many of these new fintech companies can make the process of testing and adopting new technologies remarkably easy and cost effective. Long gone are the days of long-term contracts, expensive integrations and multiyear implementations. The ability to quickly test technology and pay for rapid success is here. Banks just need to find the right partner and have the willingness to explore the possibilities.

If you are hungry for some soup and want to enjoy it, go get yourself a spoon. Stop the insanity. There are better ways to manage small business lending in a cost-effective manner, it is time to look beyond your legacy technology providers for a solution.