In an effort to take on the online lenders that have begun making their presence felt in its hometown of Pittsburgh, Dollar Bank has started offering online loans to small businesses.
“The fintech lending boom is significant,” said David Weber, senior vice president of business banking at the bank, which is the third-largest mutual in the U.S., with $8.6 billion in assets and 70 locations. “I just read that 38% of personal consumer loans were generated from fintech lenders in 2018 and that was up 35% from the previous year.”
Weber attributed some of the growth to the fact that commercial lending hadn't changed much in the last 30 or 40 years, and small businesses are looking for something different.
“We were still going through the same processes that we always went through to underwrite and approve small-business loans,” he said. “We kept hearing from people — business owners and people in our community — that one of the main things business owners wanted day in, day out was convenience. And asking for three years of financial statements and tax returns and personal financial statements was one of the main reasons why small-business owners didn't want to go through the lending process. So we felt we needed to have a transformation.”
The bank began searching for the right technology partner. Weber saw an article that Eastern Bank had developed small-business lending software under the supervision of Dan O'Malley, its chief digital officer at the time. Weber was drawn to the technology, which is now sold by the Eastern Bank spinoff Numerated (of which O'Malley is founder and CEO), because it lets banks use their own algorithms for underwriting.
“We looked at some other fintechs and the problem is, everybody has their algorithm for how to approve transactions and what they look at,” Weber said. “And not all of them are willing to disclose what that algorithm is or give you control over the algorithm. Numerated said we could build our own credit policy.”
Numerated now has 16 bank customers, including Eastern Bank, Bremer Bank, Horizon Bank, MidFirst Bank, Seacoast Bank and People's United Bank. It’s begun referring to its software as a “growth platform,” meaning it’s as much about marketing as it is about loan origination.
Each night, Numerated’s software analyzes data on 10 million businesses across 25 states against its bank clients’ credit policies. Data sources include the corporate registration databases in the states its banks operate in and the banks’ core system data among its data sources.
“Bankers wake up in the morning knowing who they can lend to and who they can’t, where they should spend their time and where they shouldn’t,” O’Malley said in an interview. “Historically, banks have relied on people walking into the branch to be able to sell products. That just doesn’t work anymore. If you want to reach out and build relationships, you need to know who to do it with.”
About 80% of businesses are not lendable, O’Malley estimates, because they're in industries his clients don't serve, they're too young, or they've had some kind of problem. The Numerated software weeds many of these businesses out.
“We can look at things like, has this business performed well with the bank, have they had any past incidences of delinquencies, do they use their checking account well, how much in exposure does the bank already have to this business, do they want more?” O’Malley said. “We can assess credit using all the data a bank has.”
Bankers search Numerated’s system to find lendable businesses. They also pull lists, such as every doctor’s office and dentist’s office in a town. They can search for every business in a market that’s gotten a loan, a credit card, payroll services, merchant processing or Treasury management service from a competitor.
Dollar vetted Numerated for a year and a half and thought a lot about the regulatory ramifications of online lending.
Weber and his colleagues took comfort in the fact that that the technology was developed inside Eastern Bank, with which they felt an affinity because it was also a mutual. Dollar hopes to offer small-business loans with the ease of use of fintechs, but with lower rates.
According to Weber, loans made by Kabbage, OnDeck and other fintechs have rates as high as 18% to 24%, whereas banks typically charge 4% to 5%. Dollar Bank would like to be somewhere in the middle.
To start with, Dollar will use Numerated’s software for loans under $100,000.
“On these smaller business loans, we need to be more streamlined and effective in not only approving and underwriting them, but getting them out of the door and funding,” Weber said.
