The future of small business lending
Small businesses need access to start-up capital as well as money to keep going. As many as half of all small businesses will fail within their first two years. And, with already thinly-stretched margins resulting from a low interest rate environment, it's an area of business lending where financial institutions have given up ground to FinTech disruptors. The reality is small business lending is expensive. It's nearly the same cost to set-up and fund a smaller loan, under $100,000, as it is to fund a larger loan, over $100,000. What are banks and other financial institutions missing out on? What are the implications for their small business relationships? These and other questions will answered in the forthcoming webinar, "The Future of Small Business Lending", scheduled for June 23. The webinar is based on a white paper of the same name which will share the results of new Vantiv research, conducted by small business banking experts Oliver Wyman and Barlow Research. Register Now.
Vantage Point sat down with Simon Powley, senior vice president, Partnership Management, Vantiv's Merchant Solutions for Financial Institutions business ahead of the webinar to talk small business lending.
"This has been the perfect space for new entrants to disrupt and to innovate," Simon said. He added, "Financial institutions need to make money from lending. Today's interest rate environment puts even more pressure there in the market for smaller loans. The cost of funding loans under $100,000 isn't significantly less than funding loans over $100,000. When you consider that up to half of small businesses fail within the first two years, this area has been risky on several fronts." It's been easier for financial institutions to focus on the commercial side of their lending business, where return on asset and return on capital numbers make more sense.
So what is a financial institution to do? In a period of tight expense control and razor-thin margins, technology investments needed to offer what start-ups have instigated in SMB lending are expensive. So too is staffing—another critical component in their FI’s ability to build meaningful program solutions.
"They can't sit it out and they know that," Simon said. "Small businesses are not as price sensitive as we think. If loan processes are made super-efficient or -fast they’ll pay extra in the form of higher rates. FinTechs have instigated disruption on a number of fronts. “Responsiveness, documentation and online experience, these are the areas where FinTechs have had an impact," Simon said. "And, with every successful business comes the opportunity for future private banking and wealth management services, so financial institutions don’t want to be disintermediated in their longstanding relationships with small businesses, which can become more lucrative as businesses create individuals with wealth."
Looking at the FinTech alternative lending landscape, business models across it, and options for banks and credit unions to partner within it is where the webinar will pick up.
"In our role as consultants we'll share with them what we've found out about the FinTechs out there," Simon said. "Not having viable options for addressing the SMB lending space is not an option for any financial institution. When it's time to partner with a FinTech provider, we'll arm them with the information they need to make the choice that's right for them."
Simon said webinar participants can expect to learn more about:
- Best practices of alternative lenders based on exclusive mystery shopping
- Targeted analysis of alternative lenders' innovations and how/why banks should incorporate these innovations
- Perspectives on winning business models
You can register for the June 23 webinar here—Register Now.