‘The best year ever’ for small banks? Not so fast.

Jorge Sun

The Paycheck Protection Plan drove customers and revenue to community banks in large numbers last year, leading many to see 2020 as a banner year for small banks. With the second round of PPP in 2021, that trend should continue. But let’s not start celebrating yet. Banks that administered PPP successfully may enjoy gains for the short-term, but at what cost?

Yes, community banks enjoyed a disproportionate share of PPP traffic and revenue in 2020. According to the FDIC, community banks made close to one third of all PPP loans even though they held just 15 percent of total loan balances in the industry. By comparison, larger banks with 85 percent of industry balances made just 69 percent of PPP loans.

If we assume a static environment, comparing year-over-year loan volume and revenue, then sure, The Wall Street Journal headline “‘The Best Year Ever:’ 2020 Was Surprisingly Good to Small Banks” has some legs. Unfortunately, while community banks were posting short-term wins, the business of lending itself was transforming at a faster clip.

Amidst the increasing PPP loan volume, one that sustained community banks through what could have been a crippling year, other developments throughout the marketplace point to greater challenges ahead.

PPP distracted community banks from future-proofing.

PPP revenue — while welcome — didn’t come easily to banks. Story after story recounts endless 24-hour shift work at community banks where processing applications became an all-hands-on-deck exercise. One CEO reflected on the experience in The Washington Post. He traditionally dedicated 20 employees to small-business lending, but last spring trained an additional 60 employees to handle unending PPP demand. “It was like drinking from a firehouse,” he said.

Community banks drank up what they could, but were stretched incredibly thin. Many sacrificed momentum on their digital growth and process improvements to make it happen.

Meanwhile, global lockdowns forced most industries to bring a laser focus to bear on their digital transformation. According to a study by Twilio, COVID-19 has accelerated businesses’ digital strategies by as much as six years, and in just one quarter last year, eCommerce sales grew by 30 percent. Even the most quaint mom-and-pop shops boosted their digital capabilities with options like online ordering to meet their customers’ needs. They had no other choice.

Because of PPP, community banks did not face the same urgency to adapt or die. Now, they’re in danger of becoming victims of their success. They can’t survive on a business model that relies heavily on human capital to initiate more loans, physical document hand-offs, and manual oversight of the lending and servicing process.

They particularly can’t survive in a market flooded with high-tech service providers.

Competition is multiplying and it IS digital-savvy.

Meanwhile, the competitive landscape is changing quickly. On a January analyst conference call, JP Morgan Chase CEO Jamie Dimon acknowledged delivering a candid message to his management team regarding the challenge they face from fintech companies: “We should be scared s—less.”

Dimon said they must prioritize being “quicker, better, [and] faster” to keep up with fintech companies like Square and Paypal, which recently surpassed Goldman Sachs and Bank of America, respectively, in market cap.

It isn’t just fintechs that have traditional banks feeling the squeeze, either. Amazon, Facebook, and even Walmart are pursuing lending opportunities — a path made easier just last year by the FDIC loosening restrictions around banking charters.

Digital-first companies like Kabbage and Square are built for the evolving marketplace and the demands of business owners. And non-traditional lenders like Google and Amazon have the cash reserves — a supply that continues to grow under recent tax changes — and innovative cultures to drive new solutions that meet shifting demands.

Alternative lenders, merchant processors, and digital giants are by their very nature more efficient than traditional banks. They are aided by advanced algorithms and software that will analyze financials, process credit requests, and deliver a streamlined process to the business owner from start to finish.

So, how can community banks and credit unions catch-up and turn last year’s gains into momentum for long-term growth?

Embrace technology that serves the customer and the bank.

Community banks emerged from 2020 with a major PR win over the big players. The reason PPP was a boon for many small banks is that they could react much more quickly than their larger counterparts could. As big banks waded into PPP lending with additional scrutiny and favoritism toward their clientele, many small banks jumped right in and gained customers in the process. There is an opportunity for these banks to convert PPP customers into long-term relationships — especially considering pent-up demand for funding after a year of tightened purse strings — but not if they’re dragging around yesterday’s technology or worse yet, still operating manually.

A community bank is not going to match the in-house digital capabilities of Kabbage or Square, but there is no need to panic. The right partnerships can level up a community bank’s digital services while bolstering their unique competitive advantage: customer relationships.

According to PwC, ninety-four percent of financial services leaders expect to grow their revenue in the next two years through partnerships with fintech. Community banks can find specialized partners who understand the unique needs of small businesses and provide a seamless automated and personalized solution from the beginning to the end of the loan process.

Improved technology does not come at the expense of customer service, either. On the contrary, customers still value the relationship, precisely where community banks shine. They just want a contemporary relationship. That means convenience, flexibility, transparency and online access. Industry-leading technology can fulfill these needs.

And with automated processes in place, people — the faces of the hometown bank — can shift back from servicing loans round-the-clock to bolstering the person-to-person relationships that set their bank apart in the first place.


Jorge Sun is CEO and co-founder of LendingFront. Sun started the company in 2015 after spending time at Capital One as head of small business credit. He previously was part of the founding team of OnDeck, where he served as chief credit officer.