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Commercial Lending

The Partnership Series – Volume Two: Fintechs Working Hand-in-Hand to Enhance the Small Business Lending Experience

Mark Messick
Jan 24, 2020


Fintechs, by their very nature, have sought more efficient ways of solving routine manual processes. Frequently, these providers have found that by partnering with one another, they can eliminate speed bumps from multiple systems and improve the user’s overall experience. This melding of technologies is a cornerstone principal in the philosophy of so many fintech providers. A partnership with any of them will most likely include more than one valuable piece of functionality.

While much is being written about financial institutions (FIs) and fintechs working together, it typically references a single solution to a problem. Consideration should be given, however, to the power of two or more fintechs working to provide even more robust solutions. Because the fintech universe has become so diverse over the last 10 years, the possibility now exists that marrying multiple sources of technology can significantly improve the lending experience.

Consider the potential impact on two of the most significant aspects of lending: user experience and decision-making.

Characteristic #1 – User Experience

Borrowers consistently cite poor experiences as the number one failing of FIs. It’s often the difference between gaining/retaining relationships and losing to another lender. More than one industry analyst has extolled the virtue of user experience, but this quote sums it up best:

“In a world of commoditized banking products, UX is the ultimate differentiator.”

- Dan Latimore, Celent analyst

Frictionless applications in the consumer world have raised the bar for all types of loans. When lenders have products that leverage simple, intuitive functionality, the borrower’s perception is ease of use. Today, this can manifest itself in “pre-fill” applications with data from outside sources, plus secure sharing of financial information at a single touch. These kinds of innovations, which are readily available from fintech providers, save time and effort while passing a completed “package” to the lender. Instead of collecting documents via a series of touchpoints and scanning them for review, the lender can now focus on building a relationship with the borrower.

7 Characteristics of Successful Technology Partnerships

While community-based FIs like to tout customer service, borrowers actually prefer better access to information and tools instead of what they view as outdated methods of requesting a loan. In a recent Aite survey, small businesses clearly stated their preference for digital banking tools over all other characteristics:

Selection Criteria for New Banking Partners

Characteristic #2 – Decision-Making

Whether combining financial analytics with non-traditional metrics to gauge the propensity-to-pay or establishing baseline trends with automated updates from multiple credit sources, fintech providers have been leading the way with analytics. When new tools can bring decision times down from 3-5 weeks to 3-5 minutes, everybody wins. FIs become more efficient and therefore more profitable. Borrowers get access to capital quicker and can take advantage of favorable business conditions. Being able to access this data quickly makes partnering with fintechs an invaluable advantage for today’s FIs.

Here are the top ways that non-traditional data available from fintechs can play a meaningful role in decision making:

  • 'Quick' decisions – No borrower likes to wait on a loan approval, but days are infinitely better than weeks, and honestly, minutes is today’s expectation. While a full-blown yes with an electronic closing is the goal, some types of loans may require a “qualified” yes. Part of what digital mortgage and consumer lenders have done well is take the borrower off the street. By providing a conditional “yes,” the borrower is free to stop shopping. When you can attract and retain prospects because of the experience, the bottom line becomes less about price. An entire market of lenders has benefited from the “ease versus cost” line of thinking. Again, Dan Latimore of Celent sheds light on this topic:

Quicken Loans is not competing on price, but on experience. They charge 0.125% to 0.375% more on their loans because their CX is so seamless.”

So why are FI’s reluctant to follow suit on small business loans? Two reasons:

    1. The common fallacy that business loans require more complex underwriting than a consumer loan.
    2. Reams of due diligence improve the odds of a business loan performing.

In actuality, most small business loan applications don’t require either one for a decision to be made. According to the Census Bureau’s Annual Survey of Entrepreneurs, the share of U.S. businesses with less than 20 workers is 98.0%. 25 million of them don’t employ anyone other than themselves, and they aren’t asking for large sums of money.

So why would a lender use a decision model built for a complex commercial transaction instead of something simpler? Old habits die hard, and the use of “alternative” data makes most lenders wary. Fintech lenders, however, have already figured out the kinds of attributes that lead to success over failure and have built them into their decision engines.

  • 'Re-decisioning'– Part of the future includes ways to make more small business loans efficiently while ensuring they perform. Using fintech data providers to leverage key attributes can both help qualify more borrowers and manage the risk. How a consumer handles their personal finances can provide valuable insight into how they will manage their business in the future. Far beyond the credit score of an individual, alternative analytics can lead to actionable parameters for any decision-making model. These insights can help turn loans that might have been declined into approvals and improve closed loan volume. Here are five reasons why FIs should consider the fintech partnership strategy:
      • Using often overlooked indicators of creditworthiness can lead to a significant return on investment and more satisfied borrowers. More borrowers lead to more relationships, greater revenue, and blossoming market share.
      • Traditional lending models are tuned to Prime borrowers and result in an undue number of turndowns. Savvy lenders will seize this opportunity to find diamonds in the rough.
      • You’ve already paid for these leads, and higher turndown rates equal more sunk costs. Advertising and marketing play a big role in the acquisition of new relationships. Don’t give away profits when advanced analytics could yield more approvals.
      • The power of “second-look” analytics can be focused only on a subset of applications, keeping costs low but maximizing the number of possible opportunities. Additional tweaks can further refine the volume of candidates.
      • The “non-prime” market continues to expand. According to the FDIC as of 2015, 52 million Americans had a single banking account and used alternative financial services to pay bills and manage finances. They represent $141 billion in revenue and continue to have trouble getting access to working capital.

    The future of business lending is certainly bright. Economic indicators suggest that more business owners will be seeking credit in the coming months and years. Now is an excellent time for FIs to position themselves as the lender of choice for this growing loan segment. By establishing a “best-in-class” user experience and coupling it with decision-making tools that improve success, an FI can establish a fortifying presence in the market while other lenders fight for the table scraps. Partnerships with fintech providers that enable such a strategy are a winning formula in the battle for relationships and profitability.

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