Small business loans have historically been the centerpiece of community banks. In fact, community banks account for more than half of small business loan volume, according to Harvard’s Kennedy School.1 But there are other more compelling reasons why these loans are a significant part of community banks’ revenue. Small businesses rate community banks high in their delivery and servicing of such loans. According to a Federal Reserve Bank survey, community banks received the highest satisfaction score — higher than credit unions, large banks and online lenders.2
Enter fintech firms, shaking up the status quo in the financial services industry and driving disruption, innovation and competition. They’re targeting lending, with a focus on small business and consumer loans, and they’re succeeding. Funding Circle is just one prime example — an online small business loan platform that originated $800 million in loans in 2014 (roughly the size of a community bank’s portfolio). In 2015, Funding Circle forecast that its originations would reach $1 billion for the year.3
Fintech companies’ innovative and advanced technology enables the rapid submission of loan applications and approvals, all via digital platforms. This very efficient and automated underwriting process, driven by data analytics and cutting-edge technology, delivers a simple, seamless and rapid consumer experience. However, this is the very thing that many community banks find challenging to deliver, because they are hampered by their legacy operating systems in an industry traditionally lacking innovation, agility and advanced technology.3
Competitors though they may be, fintech companies and community banks are beginning to see the potential of collaboration. Fintech firms see the advantages of leveraging banking’s large and loyal customer bases, experience with risk and regulations, broad product sets, established trust and deep financial pockets.4 Community banks can benefit from fintech firms’ technological advances and seamless customer experience delivery.
“There’s no question that fintech is changing the landscape of financial services,” says Charie Zanck, Chief Executive Officer of American Community Bank and Trust. “In order to remain competitive, it’s important that we create a digital platform that delivers a seamless, efficient experience for our customers, particularly for services critical to our business model. Whether you choose to do that by upgrading legacy systems and infrastructure with advanced technology, or by partnering with a fintech company, the time has come to develop and implement a strategy.”
Choosing to partner with a fintech company may be the best method for some community banks to deliver more cutting-edge services and remain competitive. Options range from affiliating with fintech firms that can make operations more efficient or partnerships focused on the front end, like loan transactions.
In considering a partnership with a marketplace lender, “Different banks really need different things,” says ABA Vice President Rob Morgan (quoted in a recent ABA Banking Journal article). He advises that there are five key issues to keep in mind: the customer experience, the financial trade-offs, the operational process, reputational effects and the regulatory response — and the process needs to complemented by robust due diligence.5
For community/small banks considering a technology upgrade, work with a technology partner that has deep understanding of the marketplace, is knowledgeable about industry vendors and can give you an edge on the competition.
Perhaps the most compelling reason to take action is provided by the survey results in the World Retail Banking Report that show how quickly fintech firms are catching up with traditional banks in the area of trust. Banks view customers’ trust as their greatest strength, but today the percentage of customers who somewhat or completely trust fintech firms is up to 87.9%. It’s time to take some action.6
This article first appeared in the Summer 2016 issue of FINTALK Report.
1bankingjournal.aba.com, “Small Business: A Competitive Edge for Community Banks,” April 2016
2stlouisfed.org, “Small Businesses More Satisfied with Small Bank Lending,” March 2016
3frbatlanta.org, “Fintech Companies: Banks’ Allies or Rivals?” March 2016
4thefinancialbrand.com, “Banking and Fintech: An Uncommon Partnership,” November 2015
5bankingjournal.aba.com, “How to Understand and Partner with Marketplace Lenders,” February 2016
6worldretailbankingreport.com, “World Retail Banking Report 2016”
7thefinancialbrand.com, “Banking and Fintech: An Uncommon Partnership,” November 2015
8bankingjournal.aba.com, “Which Lenders Are Small Businesses Most Satisfied With?” March 2016