One of the biggest ways FinTech firms have been able to gain a competitive edge on traditional banks, for small business (SMB) customers, is through relationship-building.
Banks are shuttering their physical branch locations at the fastest pace in years, according to The Wall Street Journal (WSJ). Small business financial services (FinServ) experts have warned that a lack of access to human bank representatives is harming SMB owners' ability to not only obtain the bank products they need, but the advisory services they crave from their financial service providers. The implications of this can be significant.
"For business owners, the absence of branches and the face-to-face relationships that go with them can complicate everything, from getting financing to depositing earnings to making payroll, and local economies can suffer as a result," said Fortune in August, covering news that Chase announced plans to open 400 more bank branches to support SMBs affected by industry-wide branch closures.
While exact data is sparse, credit unions (CUs) are often lumped into commentary about branch closures and their impact on small businesses. However, Trevor Dryer, co-founder and recently former CEO of small business lending technology firm Mirador, said that unlike large banks, credit unions often offer a more localized and personalized approach to servicing their small businesses.
"What differentiates credit unions in the small business finance space is that they are very member-focused," he recently told PYMNTS. "They are able to offer their small business member bases competitive rates for funding, in addition to resources and personalized support. ... It's the personal guidance that's the secret sauce [to] enabling small businesses to grow and thrive."
While bank loans may be small businesses' first target when they need financing, research from the "Biz2Credit Small Business Lending Index," released last month, found credit unions approved more than 40 percent of small business loan applications last October. That is significantly greater than the 26.8 percent approval rate at large banks (small banks approved even more — 50.1 percent — during the month).
A variety of factors go into why large banks are less likely to approve small business loan applications than credit unions, including tighter risk and capital control requirements, as well as greater application volume. However, the data may also reflect the ability for a small bank or credit union to develop a relationship with SMB clients that is of higher quality than major, multinational financial institutions (FIs) — perhaps even without face-to-face interaction in a physical branch.
Mirador recently took a major step in positioning itself to service the credit union community. This week, the company announced that it reached an agreement to be acquired by one of its investors, CUNA Mutual Group, an insurance and financial technology provider to credit unions (CUNA Mutual invested in Mirador last year via its venture capital arm CMFG Ventures).
The acquisition not only signals the strengthening role that credit unions play in small business finance (according to Dryer, there are 1,900 credit unions in the U.S. that currently offer small business loan products today, "with many more considering it"), but reflects the credit union community's interest in following one of the biggest trends to emerge in the last year: FI-FinTech collaboration.
It's a topic generally dominated by news of traditional banks partnering with or acquiring FinTech firms, often in an effort to outsource product development to more quickly introduce enhanced digital solutions to their clientele. This often comes in the form of collaborating with FinTech firms that address key friction points in small business finance, including SMB lending, as banks face pressure to improve their service and product offerings.
In some ways, the trend allows banks to compensate for physical branch closures, shifting investments and resources to digital platforms to promote a positive small business customer experience and develop relationships virtually.
Mirador's acquisition shows that credit unions seem eager to capitalize on their position in SMB lending, which Dryer expects to grow.
"Credit unions are looking for technology that will create time savings on routine back-office processes," he said, "enabling them to focus on member interactions that bring a value-add."
Like big banks, credit unions' collaborations with FinTech firms are an investment in product and the small business customer experience, added Dryer.
"The role of [a] credit union continues to be that of a trusted advisor for [its] small business member base," he continued. "Top-tier banks, while having invested in FinTech innovation and digital transformation, still lack personalized interactions."
Credit unions still have a lot of ground to cover to compete with big banks, however. The Federal Reserve's 2017 Small Business Credit Survey found only 26 percent of small business loan applicants, deemed medium/high risk, were approved for financing from a credit union, lower than large and small banks (35 percent and 47 percent, respectively). Furthermore, credit unions were chosen by just 9 percent of small businesses that sought credit, meaning the category came in last place behind online lenders (the source of 24 percent of SMBs).
At the same time, however, the Fed found credit unions have the highest net satisfaction levels among non-applicant customers, at an impressive 81 percent — compared to just 43 percent for online lending platforms.
Credit unions' participation in the FI-FinTech collaboration trend may be an opportunity for this category of lender to combine its high customer satisfaction rates with the popularity and technological agility found among FinTech firms. According to Dryer, marrying these two goals of small business lending is no easy feat, and while tech is key, the customer experience trumps all.
"The digital lending experience for small businesses is a complicated, sometimes confusing, process," he noted. "The differentiator is a true focus on the small business customer[s] themselves — not the front-end application, the loan origination system, or the compliance or underwriting process. It's about understanding and humanizing the unique challenges the small businesses face when seeking capital."