Community Banks Take A Swing At FinTech Collaboration

Last week, P2Bi announced the rollout of a new partnership program that enables community banks to participate in its small business loan marketplace.

Community banks are typically a better bet for small businesses in search of a loan, with approval rates higher than those at larger financial institutions. But the latest data on SMB lending in the U.S. suggests a shift is ahead.

Earlier this month, Biz2Credit released its monthly Small Business Lending Index and found that approval rates at large banks increased more than they did at smaller community banks. And while community banks’ SMB loan approval rates are still higher than those at large banks (49.1 percent compared to 24.8 percent, respectively), separate analysis from the Federal Reserve, also published earlier this month, concluded that community banks are beginning to reexamine how small businesses fit into their broader loan portfolios.

A look at lending data suggests that “community banks have lost some ground to bigger banks in small business lending over the past three years,” the Fed said in its report, “Community Banking in the 21st Century.”

The Fed found that small business lending at community banks actually declined in 2016, while SMB lending at big banks increased over the same period. Competition from FinTechs in the near future, the report added, is sure to increase pressure at small banks, too.

But as more large FIs begin to partner with those FinTechs in the name of small business lending, community banks may be looking to do the same. At least one FinTech, P2Binvestor, is already positioning itself as a collaborator with community banks.

Last week, P2Bi announced the rollout of a new partnership program that enables community banks to participate in its small business loan marketplace. Krista Morgan, CEO of P2Bi, recently explained to PYMNTS that the loans are a hybrid of community bank and private investor financing, resulting in a lower rate for small businesses.

But there are other benefits for SMBs in connecting with community bankers, she added.

“Most small business owners prefer to be a strong customer at a smaller bank,” she said. “They get better service. It’s more personal. Small business owners still want a relationship with their banker.”

It’s a sentiment echoed in the Federal Reserve’s own report, which found that, while facing greater competition from large FIs and FinTechs, community banks’ competitive edge remains the ability to connect with SMBs on a deeper level.

“Close relationships between community banks and small businesses often present opportunities and incentives for collaboration in other areas,” the Fed concluded.

“We think it’s hugely important that community banks can actually lend in their communities,” Morgan added. The problem, she continued, is that small businesses may only be, say, 80 percent “bankable” to these lenders.

Pointing to the stringent bank regulations of today, Morgan explained that typically, small businesses don’t meet the profile of risk-averse lenders.

“The community bank says, ‘If only you had profitability for six more months, we’d be able to get you in,'” she explained. “This program lets them say ‘yes’ a little more often to a business they know is going to be fully bankable in 18 months.”

But there are more hurdles preventing community banks from lending to small businesses than simply the risk factor. Morgan noted that financing a small business on assets like invoices makes for incredibly complex management of those loans.

“These businesses are on the edge of profitability. They’re not fully bankable,” the CEO said. “We’re lending on assets, on receivables, on inventory, and we have clients that may have thousands of invoices at any one time. One of the technological hurdles that community banks face if they want to make these types of loans is – forget the risk profile – they need to have software that’s expensive, [and] they need an entire team to be able to do all the administration of these loans.

“They’re trying to stay on top of collateral that is changing basically every day,” she added.

Many of the options out there for community banks to implement software that enables them to make these types of loans to small businesses are simply “not good,” Morgan stated. Working with FinTechs offers them a better experience overall of meeting this borrower demographic, she said.

The CEO said P2Bi is looking to work with community banks’ commercial lending departments, not their small business lending units, to enable them to make higher-value small business loans through the platform via these hybrid loans. With small banks facing greater pressure than ever from large banks and alternative finance players, Morgan said collaborating with some of these industry participants could be the key community banks need to maintain their relationship to the small business community.