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UncategorizedTechnology is Pushing Small Business Lending at Banks

Technology is Pushing Small Business Lending at Banks

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Small business lending continues to reach new heights. This is according to the latest Small Business Lending Index by Biz2Credit. The index classified the lending into two categories, small banks and big banks.

The former’s approval rates jumped to 49.8% in March from April while those at big banks reached a 27.5% high within the same period. This shows a steady climb in business loan applications, and this is all attributed to the rise in digital banking.

In this technological era, many banks are in a race to embrace the latest technology in order to woo more customers and retain existing ones. It’s for this reason that banks have partnered with fintech companies in a bid to streamline their online loan application process.

Therefore, it would be wrong and unfair to criticise banks by stating they don’t embrace technological innovations. As a matter of fact, both have been moving in tandem for the past few decades, at times a mile ahead of the others.

Image: Pixabay/rawpixel

For example, take a look at the cashless payments almost everyone uses today. Credit cards, the most popular, have been in existence for the last 60 or so years, with debit cards coming in 30 years ago. Both forms of payment enable direct transactions.

Today, thanks to technology, the same services are available elsewhere making plastic cards almost unnecessary, especially with the introduction of smartphone technologies. However, even with the goodies’ technology comes with such as volume, speed, interoperability, scale, and security, regional banks and community banks have reasons to be worried.

The End of Community and Regional Banks?

According to Karen Mills, a former SBA Administrator, during an interview with the American Banker, the next banking evolution will be as a result of the partnerships between banks and fintech companies. 

In addition, American Banker also hinted at the difficulties community and regional banks will face as a result of the big banks investing huge sums of money in technology. A good example is JPMorgan Chase, which is reported to have spent close to $11 billion in technology alone.

Mills said this move is aimed at taking advantage of the fintech’s platforms and technology, instead of the banks building them. With such resources at their disposal, the banks can determine the creditworthiness of a small business by looking at their eBay activity, Amazon purchases, and bank accounts.

The Rise of Fintech Companies

During and after the last financial crisis, it was next to impossible for a small business to secure a business loan, either for a startup or for expansion. Banks were in panic mode and didn’t want to end up with customers defaulting their payments.

Thus, they imposed hard-to-achieve terms in order to qualify. As a result, small businesses headed failed—until fintech companies surfaced.

They saw a gap in the lending market created by banks and came up with a revolutionary loan application process for small businesses looking for expansion and startup capital. Entrepreneurs flooded these fintech companies, and a chain reaction started.

Online applications went through the roof, and business owners didn’t have to wait for lengthy periods of time to get a decision on their loan applications. The decisions were super-fast, all courtesy of data analysis.

You see, banks relied on tons of paperwork which, in turn, resulted in a long waiting period. With fintech companies, entrepreneurs could submit online applications. That’s not all. The icing on the cake was that this was possible 24 hours a day, which meant no banking hours, a much-needed convenience.

A Win-Win Situation

After evaluating the marketplace, banks and other institutional lenders decided to get ahead of the curve by partnering with the fintech companies such as Biz2Credit, in order to tap into the large and growing digital lending market. This means everyone wins, the fintechs, borrowers and lenders.

This valuable partnership has also provided institutional lenders with an active role in small business lending. As a result, they get more in revenues and reduced default rates, both indicators of the advantages of this partnership.

Another indicator is the number of small business loan requests approved by institutional lenders in April alone. A whopping 65.3 percent. By all standards, this is an impressive and encouraging figure. In fact, this was evidence that the sky is the limit for small business lending after the recession.

Nevertheless, there’s one type of lender suffering under the rise of fintech companies and that is credit unions. This is evident from the reduction in post-recession loan approvals. 

However, it doesn’t seem the situation will remain the same for long, especially after their quest to seek fintech partnership in order to remain competitive. 

Millennials are today’s customers. They’ve grown up in the technological era, and they don’t have the time to make a physical appearance in order to fill out a form when there’s a fintech offering a digital solution (something they are accustomed to).

By digitizing the entire loan application process, customers can apply for from their smartphones, and credit unions can turn around their fortunes in the process.

It’s no doubt that banking, similar to other industries, is in the middle of rapid change, all because of technology. In the past, change was slow, constant, and incremental values, but not today. It’s now a roller-coaster ride and every financial institution and the regulators as well are in a constant race to ensure they remain competitive.

It’s already happening in China and in other countries where there are few physical banking locations. In addition, this change in the banking sector may lead to reduced demand for specific job skills.

While this sounds like doom and gloom, plenty of good news lies ahead; for instance, small business owners can enjoy fast responses to their loan applications, easy access to business funding, and above all, a ripe economy to ensure business growth. This means entrepreneurs who shelved their ambitions of running a business can now join the process and apply for a loan with low rates.

However, institutional lenders will need to proceed with caution if they are to realise the full benefits of digitised banking. This means building on the strengths of their traditional methods which include understanding the product, brands, networks, and customer relationships. To do this, they’ll have to have a clear transition strategy which will ensure their core functions remain available, while they embark on innovation and growth.

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