At the start of this year lots of “financial experts” made predictions about banking and business trends in 2016. Most of the predictions had more to do with “Silicon Valley” than “Main Street” banking except one…the so-called “financial experts” predicted an explosion of Online Loans! Next to “Federal Regulators,” nothing strikes more fear in Community Bankers than…Online Loans! Since 2008 Community Banks have struggled to generate enough revenue to keep their shareholders happy and grow their bank. With retail branch traffic and revenue drying up, making small business loans was the only sure way community banks could weather the recent financial storm. So if the predictions about Online Loans were true, it would be a major threat to community bank revenue opportunity.
There has been a decades-long trend of consolidation in the banking industry, particularly among community banks that are traditional small business lenders. Coupled with the higher risk of small business loans, this consolidation has made traditional bankers reluctant to lend to small business owners as the economy has recovered.
Alternative Online Lenders such as Kabbage, Fundation, and OnDeck have risen to meet this opportunity through unique online underwriting technologies and are experiencing strong growth in serving this market. New entrants, new partnerships with traditional banks, and a wave of new capital flowing into this segment of lenders were predicted to set the world of alternative online small business lending on fire in 2016.
So far Online Loans has not been as big a threat in 2016 for Community Banks as predicted. But that could all change in 2017. With more Fintech companies looking for ways to capture more of the banking share of market, it’s only a matter of time when Online loans will catch fire. So what can community banks do now to prepare to compete with Online Lenders? There are three traditional ways to compete…Community Banks can either provide small business loans that are cheaper, faster, or better!
1. Cheaper…Community Bank spreads are already razor thin so competing on price with online lenders is definitely not the right answer. The online lenders have less overhead expenses and no branch network to fund so they can offer their loan services at a lower rate than community banks.
2. Faster…Let’s face it, online lenders have automated the loan approval process to provide small business clients a quick turnaround. Very few if any community banks can turn around small business loans that fast without taking some enormous risks. Community Banks can streamline their current loan approval process some but it still will be tough to compete with the Online Lenders on speed.
3. Better…Bingo! Online Lenders can’t provide true personal service to small business clients. They do only one thing…make online loans! And most small businesses need a lot more than just a loan. Community Banks can offer small business an on-going partnership that provides valuable information as well as help with other cash flow and financial challenges and pitfalls.
Providing better customer service is the key to Community Banks being able to compete with Online Lenders. By offering better customer service than Online Lenders it will help encourage small business clients to continue their relationship with the bank through good times and bad.