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Banks Need To Find Better Ways To Invest In Small Businesses

Smallbus Potential Blog1

If they don’t, then they are likely to lose market share to fintech companies with agile solutions and an appetite for risk.

The digital economy has levelled the playing field in ways that were unimaginable at the turn of the century. Companies can go from startup phase to global leader in just a few short years. Consider the case of Blue Apron, the home meal delivery service, or Compass, a company that uses technology to reduce the hassle of buying and selling apartments, or even Illumio, an online security company that uses code to secure applications for its customers.

What do these three businesses have in common? Today, they all have a billion-dollar valuation and none of them existed five years ago. Would any banks have turned them down in their formative stages? We’ll never know, but how many other future ‘unicorns’ are out there struggling to get funding.

The Struggles Of Small Business

Small businesses are the lifeblood of an economy - creating two out of every three new jobs in the economy and acting as the springboard for so many of the innovations that gradually find their ways into everyday life. Yet the Federal Reserve reports that bank lending to small business peaked ten years ago and today, it remains at 16% below that 2008 level, despite a surge in business confidence over the last few years as the economy roared into high gear.

Despite the broad health of the economy, 64% of small businesses experienced financial challenges during the previous 12 months.

The Top Three Challenges were:

1. Paying operating expenses
2. Credit availability
3. Debt payments

More than half the loans requested came in at under $100 000, yet only 46% of small businesses received what they applied for. As a result, small business owners are frequently forced to risk their personal money in order to fund the business. The FDIC reports that 67% of small businesses tapped personal funds while only 39% took out additional debt.

The Role Of Banks

If small businesses have so much potential in today’s connected world, why are banks reluctant to invest in them?

Here are the five most cited reasons that banks don’t invest:

  • 36%: Insufficient credit history
  • 35%: Insufficient collateral
  • 30%: Too much debt already
  • 27%: Low credit score
  • 22%: Weak business performance

No doubt those reasons are often valid. But sometimes it’s possible that the bank lacks the vision to see what this company is capable of in the future. And they need to know that that is not the case for more agile fintech firms who may be more than happy to take a chance on a client with little track record but the chance of becoming a huge player. McKinsey predicts that if financial institutions do not move quickly to engage with small businesses digitally, they risk losing as much as 60% of their overall profits to fintech disruptors over the next decade.

Banks need to look at technology that can give them better insight into what a company could become, through the way they interpret data.

Why are small businesses turning to online lenders?

Photo by rawpixel on Unsplash

They say ‘yes’ more often - The word spreads quickly about which financial institutions are stuck in the past and which are looking to invest in the next generation.

Their onboarding is simpler and faster: Nothing kills interest in a new relationship with a financial institution than a clumsy, drawn-out signup process.

Take this example from Jim Marous, the co-publisher of The Financial Brand and the Digital Banking Report. “After going through a massive paper-based process,” he explains, “my mortgage lender told me that they could not approve the refinance without at least three years of verified income from the small business. They also said that they ‘didn’t understand’  a subscription-based business, and would require a co-signer.”

This is the kind of experience that can really turn a customer off and ensures they will go look somewhere else. But traditional banks and financial institutions still have a huge role to play, and they need to know that there are strategies available to attract a new generation to bank with them and become long-term customers. 

5 Ways That Banks Can Work To Attract Small Businesses

  1. Shift their onboarding: Banks should begin to digitize the onboarding process in order to save customers time and effort in a new relationship. They need to become mobile-first and flexible enough to understand the needs of a generation who grew up in with a digital mindset.
  2. Digitize Document Capture: Inbound documents should be automatically uploaded, classified and key data extracted and saved. More resources should be spent on capturing unstructured data, such as digital voice notes, photos, and sensor-based data, and less time spent on manual ‘stare-and-compare’ processes.
  3. Sophisticated Analytics: Analytics that keep the loan officer informed of the status of the loan are vital. The system should notify the bank of any outstanding documents in real-time, and provide far more transparency to the client than they are used to. New customers should be engaged as partners.
  4. Automate the Credit Process: With better analysis of structured and unstructured data, the bank can make better, and faster, decisions to predict credit default.
  5. AI and Machine Learning: Empowered systems can learn how to classify documents and extract actionable data for intelligent decision-making.

Customer’s expectations are ever-changing. Their financial institutions need to understand the shifts in technology and perception that customers are experiencing; they need to understand micro-business trends and deliver relevant insights for a small business. If they can deliver on that, along with a feeling of partnership and support on both sides, while being confident that their technology is minimizing their financial risk, then the foundations of a successful long-term partnership are set for the future.

When a bank or lender deploys the AI Foundry solution during the small business lending process, there are significant enhancements to both the borrower experience and in the automation of the back-office processes. This increases customer interaction, satisfaction, and loyalty, which allow lenders to differentiate themselves from the competition.

Download our ebook today: Take Advantage of Expanded Small Business Lending Opportunities with Agile Solutions