FDIC Study: Banks With Advanced Tech Made More PPP Loans

For banks, especially smaller community banks, the key to powering through economic tumult may lie with technology.

The Federal Deposit Insurance Corporation (FDIC) said in a report titled “Bank Technology and the COVID-19 Pandemic” that “the conventional view on the comparative advantage of small banks’ business models centers on relationship lending.”

That conventional wisdom, the report said, means that smaller financial institutions (FIs) can acquire “soft” information on would-be lenders that would not normally be seen on a loan application.

Indeed, the FDIC said, as of the end of 2019, smaller banks were responsible for 31% of small loans made to businesses, even though they only had about 15% of assets.

“Yet, increases in data availability, advances in statistical classification methods to identify risk, greater computational power, and the rise of financial technology firms have the potential to erode the benefits that smaller banks derive from their comparative advantage in soft information gathering,” said the FDIC.

Technology Expands Client Roster

The study was focused on how banks’ technological investments could impact their ability to at least maintain and even expand their businesses in the wake of the pandemic.

Broadly speaking, the FDIC found that the more the bank had its “coverage of products installed at non-bank FinTech firms” (resulting in a “FinTech Similarity Score”) the more Paycheck Protection Program (PPP) loans it extended as measured during the second quarter of 2020 — roughly 9% more as measured in volume.

“Furthermore, advanced technology enables banks to supply PPP loans outside of their branch market area, though this more geographically dispersed lending does not crowd out in-market lending. Thus, technology-intensive banks, which seem to operate as a hybrid between physically-based traditional banks and less physically-based nonbank FinTech lenders, can compete effectively for financial products that are less reliant on a relationship lending,” the study found.

Separately, traditional FIs are indeed taking new technology in hand to ease various pain points (well beyond the confines of lending) encountered by their enterprise clients. Many FIs are changing how they look at technology and seeking specific technical solutions. Those innovations include but are not limited to automated account validation and digital lockboxes.

Drilling down a bit, 42% of FIs consider invoice reconciliation to be an important problem for corporate clients paying suppliers. Sixty-six percent of FIs believe the ability to offer digital payment solutions is highly important to their clients.

Read more: How 311 FIs Are Using Technology to Fix B2B Invoicing, Cash Flow Frictions