A recent financial services consultant report found that a litany of factors have placed small business lenders at a competitive disadvantage to larger financial institutions and credit unions.
To combat the challenge, the white paper, released this month by Velocity Solutions, calls on all banks to develop a digital loan platform. Doing so is especially important, Velocity Solutions noted, as fintech startups also become industry competitors. According to the report, existing challenges for community financial institutions that are not offering small business lending include a lack of staffing to implement the changes; banker feelings that doing so is not profitable; confusion over changing regulatory guidance; and a lack of internal technology resources needed to build such a platform.
Those findings come after The Federal Reserve’s 2021 Small Business Credit Survey revealed applicants were most satisfied with credit unions and small banks. However, the report also found that 23 percent of businesses that applied for financing still had a financing shortfall, and 30 percent had unmet funding needs. Less than half had their financing needs met.
“Government programs such as [the Paycheck Protection Program] and [the Economic Injury Disaster Loan Program] certainly helped, but a good deal of those relief efforts were fraught with problems, executed poorly, confusing to applicants and still left a huge credit chasm,” the report stated. “And what did the big banks do? They tightened their underwriting standards for small business loans, requesting more detailed information on cash flow, revenue or potential growth that many smaller businesses simply do not or cannot maintain in this pandemic-ravaged marketplace.”
According to the white paper, community banks also face stiff competition from neobanks, which “have essentially erased the lines and redrawn them with a whole new set of rules that we have never seen before.” A number of fintechs made waves last year, including Varo, which in February 2020 became the first fintech to obtain a national bank charter. Then, fintech Jiko purchased Mid-Central Savings Bank in September 2020, and Square opened as a bank the following March.
“The movement in 2021 alone has been staggering and borne from a digital-first mentality that has pervaded almost every area of our transactional lives,” the report stated. “We are seeing more of a direct competitive threat than ever to community financial institutions. And the threats encompass not only small business lending, but the entire spectrum of a financial institution’s offerings.”