The level of market volatility hitting the U.S. and other nations around the world as a result of the global pandemic continues to draw comparisons to the 2008 financial crisis — so it's only natural that analysts may turn to the past in an effort to predict what could lie ahead.
For small businesses, the aftermath of the financial crisis more than a decade ago led to massive disruption in the ability to access financing as large banks pulled back from the customer segment. It also opened the door for a boom of FinTech innovation and a flood of alternative lenders targeting the small- to medium-sized business (SMB) segment.
After industry consolidation and a leveling-out of venture capital interest, alternative SMB lending remains a strong market, though just like traditional banks, it has also faced new lessons as a result of the current market. John Diamond, president and chief operating officer of SMB alternative lender Revenued, recently told PYMNTS that the industry may see some repeat patterns in the months and years ahead that the sector saw 10 years ago. But that doesn't necessarily mean history is repeating itself.
"It comes in waves, there's no doubt about it," he said about the alt-lending boom. "Everyone starts having the same idea, and then it gets less attractive, and then something happens like this COVID crisis, where the folks who actually have something will be the ones left."
A Banking Pullback?
One factor that is drawing renewed interest in the alternative lending segment is the possibility that, as they did in 2008, big banks may again pull back from small business lending in the wake of the coronavirus pandemic.
With many small businesses struggling financially, and some carrying significant debt on their balance sheets despite loan forgiveness for SMBs that obtained federal aid, small firms may emerge from the crisis even less attractive and more financially risky to big banks than before.
"It's not the largest market, and there are a lot easier markets to go after," said Diamond. "There are many uncertainties about what other sources of revenue a bank could get. No one has a crystal ball, but my gut tells me that, for most banks, it's not worth their perceived risk."
Once again, alternative lenders could find a chance to step into the market and fill a potential credit gap for small businesses as they work to rebuild and reboot.
But that's not to say that these FinTechs have a certain path ahead. Indeed, Diamond noted, there are many new lessons that FinTechs, banks and small businesses themselves must learn.
The More Things Change
The saying goes, "The more things change, the more they stay the same."
In small business lending, this may be most applicable to large, traditional financial institutions (FIs). It wasn't until the alt-lending boom post-financial crisis that big banks truly began to accelerate their digitization initiatives, and despite significant strides made, Diamond said he doesn't expect these institutions to emerge from the pandemic with small business loan modernization at the top of their agendas.
Indeed, a popular digitization strategy for many traditional FIs has been to collaborate with the alternative lenders and FinTechs that can fast-track them to streamlined SMB lending operations. This proved critical in recent months, as lenders large and small were tasked with frantically issuing billions of dollars in Paycheck Protection Program (PPP) aid to SMBs, with FinTechs embracing a collaborative effort to digitize the process.
And while the PPP initiative ultimately saw some major successes, Diamond noted that its rocky start was the latest example of big banks' digitization struggles.
"The classic bank model where you have to go into a branch and talk to a loan officer was shown to be incredibly inefficient," he said. FinTechs were able to facilitate this process in a digital way, whereas "a lot of banks were forced into having to learn that – and they had to learn it fast."
FinTechs may have flexed their technological muscles to support SMB relief efforts – but they, too, will face new and unknown challenges as the market emerges from historic disruption.
Underwriting technologies will be put to the test in the months and years ahead, as will FinTechs' user experience (UX) strategies as small businesses, forced to operate from home, were driven to seek out capital remotely – a digital-first approach that could stick around permanently.
What's key for small business owners today is the ability to run their businesses, seek out new revenue streams and keep cash flowing as much as possible. For lenders – both FinTechs and legacy players – it remains to be seen how borrowing behavior will change. But as Diamond noted, the industry must keep sight of what's most important: ensuring that business owners can focus on running their companies rather than the tedium of a loan application.
And it may be an opportunity for alt-lenders to once again initiate an innovation boom.
"You'll see a lot of competitors focused on streamlining processes, making it easier for the customer, and having a smooth and modern approach to a business that has been around for ages," said Diamond. "You'll see new players come in, and players that have been honing their skills for a while really take off. It's up to the banks whether or not they want to keep up."