The rise of financial technology firms has been shaking up the world of banking and lending. Fintech firms last year made up 38%& of the personal loan market, up from 5%& in 2013, and are starting to focus more on small-business lending.
And their impact is not just being felt locally. An Accenture report last month predicted traditional banks could lose as much as $280 billion of their global payments revenue to digital payment companies and non-banks by 2025.
This challenge is not new. But it is important to focus on ways to leverage the advantages of traditional banking. That is especially true for community banks.
In the loan market, fintech lenders’ main value proposition is speed and convenience, offering to crunch borrowers’ credit data through their algorithms and spit out a loan approval within 24 hours.
But as economic clouds start to gather, it’s worth keeping in mind that the fintech industry’s lending models have been developed entirely during the U.S.’s longest economic expansion. They’ve yet to be tested by a recession or major credit tightening.
When that downturn comes, small-business borrowers’ first question might be: “Whom do I call?” With fintech firms, the answer might be no one, or, at best, a 1-800 phone number or distant call center rather than a banker you trust who understands your business.
Community banks can’t be afraid to press the one-to-one advantage they have in creating partnerships with those to whom they lend.
This is not meant to denigrate fintechs or big banks. But the ability to interact with a trusted, local human being has immense value for small-business owners.
Human connection isn’t just valuable when economic times get tough; it’s also important when one-off problems arise in the course of doing business.
Maybe a loan payment was missed because the owner was sick or because the business hit some temporary headwinds. The community bank might come to the same decision as a more impersonal lender, but it will at least sit down with you and discuss options before doing so.
Borrowers often go to fintech firms hoping for easy money and a quick handshake on a loan. But that isn’t necessarily in the best interests of the business — it’s a bit like a patient going to a doctor and telling him what the diagnosis and treatment plan should be. Business owners know a lot about their business, but they usually aren’t experts on financial management.
Community banks understand that writing a loan is the easy part. The hard work comes in sitting down with the business and understanding it at a detailed level before getting to a credit decision.
Community banks act as advisers and financial consultants for their business clients. They will want to know everything about a business’s cash flow and details of its operating account in to structure the loan in a way that is complementary to the business and easier to manage. The result is a full banking relationship, including management of cash and payables that help a business achieve its goals and avoid problems.
As part of the relationship, community banks must be willing to say “no” if a business is making poor decisions. Borrowing for a building upgrade may not be the best plan if the cost is too high or your growth doesn’t support it. And a good lender will tell you so. The relationship should be more important than closing the greatest number of loans.
Community banks must position themselves as a helper for when tough times come. Even if a small business in their market is working with a fintech, community banks should keep their door open to them.
Emphasizing community banks’ clear advantages should pay off down the road. As financial technology advances, businesses will continue to value a strong, human relationship with a banker who is just a phone call or short drive away.