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Bracing For Another Wave Of SMB Lending Disruption

The financial services community continues to rally around America's small- to medium-sized businesses (SMBs) with the understanding that Main Street remains the backbone of economic recovery.

As businesses take their first steps toward reopening, there is cautious optimism to be had.

A recent U.S. Chamber of Commerce poll found a significant drop in the percentage of SMBs that said they are very concerned about the impact the pandemic has on their business, and the majority of respondents said they are comfortable with their current cash flows.

But the troubling reality is that there will be SMBs that are not able to persevere as some economists anticipate a bankruptcy wave ahead.

For Snehal Fulzele, senior vice president and general manager of Cloud Lending at Q2, the current SMB lending climate has changed dramatically in recent weeks, a disruption that occurred after a decade of what had already been a transformational shift in the market post-2008 financial crisis. In a recent conversation with PYMNTS, Fulzele explored what impact that may have on SMB lending in a post-pandemic environment, as lenders already struggle with unfamiliar challenges as the current situation continues to unfold.

A Backdrop Of Transformation

In the years leading up to the coronavirus crisis, the SMB lending arena saw massive change. A pullback of lending from traditional banks opened up a space for FinTechs to step in and accelerate the digitization of the SMB financing arena toward a more consumer-like, efficient borrowing experience.

While traditional banks have followed suit in recent years with their own digitization initiatives, there are still areas of SMB lending that have remained stuck in legacy ways at traditional financial institutions (FIs).

"FinTechs were leaders in technology adoption," said Fulzele. "We saw a lot of machine learning, predictive analytics capabilities in making loan decisions. This combination, along with using alternate sets of data, is a growing trend among FinTechs and another reason they were able to really get out there and not only give loans, but give loans to businesses typically left out by traditional banking."

Today, traditional banks' digitization efforts have proven fruitful. With closed bank branches and stay-at-home orders, connecting SMBs to financing — be it Paycheck Protection Program (PPP) funds or otherwise — via digital channels is critical. That, compounded with the brand awareness and expansive relationships these lenders already have with the SMB community, means traditional banks continue to have a significant advantage over FinTechs and alternative lenders when it comes to bridging SMBs to the capital they need to survive, said Fulzele.

An Underwriting Overhaul

For all the change that the SMB lending industry has seen, however, the one area in which FinTechs hold an advantage over traditional lenders is in their use of analytics technologies and alternative data to take a novel approach to underwriting.

Fulzele noted that for traditional FIs, underwriting strategies remain outdated.

"With few exceptions, in the majority of cases small businesses are underwritten in the same way as a larger commercial business," he explained, adding that traditional banks fail to take into account information like cash flows and even Yelp reviews when assessing the financial needs of an SMB and its ability to repay a loan.

The reason why an adjustment of underwriting strategies will be essential, he noted, is because so many SMBs have been forced to adjust their business models as a result of the pandemic, and many of those shifts are likely to stick around for the long term.

"That's one area where banks are trying to be smarter, but they haven't been able to make progress thus far," he said.

A Humane Approach

While FinTechs have proven the value of cutting-edge automation technology in the SMB loan underwriting process, the current landscape has shed light on the importance of taking a humane approach to supporting SMBs and connecting them with capital. So far, Fulzele said he has been "humbled" in witnessing a variety of experiences SMB borrowers have had, ranging from lenders' reaching out with empathy, to those offering a more cut-and-dry experience.

But in his call for traditional FIs to upgrade their underwriting strategies to prepare for a new wave of SMBs in need of financing, Fulzele also emphasized the role that the human element plays in underwriting. Although the current economic downturn may create a similar environment seen during the 2008 financial crisis, he said he hopes that a similar outcome for SMBs will not repeat itself.

"My fear is that, post-COVID, traditional banks with the most number of relationships with the small business community may reduce the number of loans they give out," he said. "My hope is banks don't use the same cycle they did after 2008, and that they take a more human approach."

That means understanding the new and evolving business models of their SMB clients, and embracing underwriting tools that can place an SMB’s financials in proper context of their ongoing recovery.

"This is my hope, that traditional banks don't just abandon these small businesses like they did in 2008," he added.

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NEW PYMNTS STUDY: LEVERAGING THE DIGITAL BANKING SHIFT – SEPTEMBER 2020  

The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.

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