FDIC: High-Touch Beats High-Tech in Small Business Lending

In small business lending — regardless of the size of the bank doing the lending itself — a high-touch approach and in-person visits to the branches are “key conduits” for extending credit, the Federal Deposit Insurance Corporation (FDIC) has found.

In its 2024 Small-Business Lending Survey, which relies on responses from about 1,300 banks taken over the course of 2022, the FDIC finds technology is part of the process, but is tied to compliance and loan servicing after the funds are in small and medium-sized business (SMB) coffers.

As for the competitive landscape, the FDIC found banks are competing more fully with credit unions and nonbank FinTechs for small business clients. There’s at least some recognition of the trend toward partnering with FinTechs: About half of banks were using or considering using FinTech in their small business lending process, said the FDIC, adding that 3 in 10 banks used FinTech within their lending process and an additional 2 in 10 banks “were discussing or developing its use.”

The FDIC findings come after PYMNTS Intelligence’s own reporting that 65% of banks and credit unions have entered into at least one FinTech partnership, and a full three-quarters of banks viewing FinTech partnerships as necessary to meet customer expectations.

Overall, according to the FDIC, “technology has not replaced the relationship-oriented and staff-intensive nature of small business lending that is focused locally around branches.”

In fact, said the report, “branches and on-site visits are key conduits for small business credit,” adding that “banks use and highly value branch locations and on-site visits as ways to generate and maintain small business lending relationships.” The majority of banks don’t allow borrowers to complete their loan applications entirely online.

Elsewhere, PYMNTS Intelligence and Velera (formerly PSCU) collaborations have underscored the value of brick-and-mortar branches. As noted here, research shows roughly 1 in 5 credit union (CU) members switched their primary financial service provider in the last 12 months — and the most influential factors spurring the switch involved convenience, including the lack of a local branch.

The Value of ‘Soft’ Information

There’s particular use of what’s termed “soft” information about businesses. Hard information is defined as being quantitative in nature; soft data’s difficult to summarize in a numeric score and requires context. Examples noted in the report include “soundness” of a business plan, experience in the industry, and knowledge of general market conditions.

Banks that rely on hard information, per the FDIC’s analysis, “can more easily separate information-collection and decision-making tasks, while banks that rely on soft information generally must assign these tasks to one person or a small group of people with specialized knowledge of an industry or geography,” as smaller banks use more soft data than their larger brethren.

The data, we note, can be hard to collect and difficult to synthesize, though technology is making strides along those avenues. In one example, and in an interview with PYMNTS’ Karen Webster, Markaaz CEO Hany Fam noted that as his firm has debuted a new global business identity platform complete with hundreds of millions of data points, “parties to securely connect with each other and create real-time, mutually consented monitoring.” Markaaz has created a pre-populated directory of over 300 million businesses worldwide, covering firmographic, financial health and compliance attributes, tied to 65,000 global data sources.