Federal Deposit Insurance Corp. Chairman Martin Gruenberg Wednesday said data indicates relationship-driven lending practices remain vital to small-business lending and economic stability for banks of all sizes, even in an increasingly modern and competitive banking system.
In his remarks — delivered to the 12th Annual Community Banking Research Conference at the Federal Reserve Bank of St. Louis — Gruenberg said the FDIC's 2024 Small Business Lending Survey report found that, despite technological advancements in the industry, small-business lending remains a largely personal affair.
"From the smallest to the largest banks, small-business lending is generally underwritten and approved by people … [and] is one of the forms of lending that has remained the most consistent and traditional in how it is conducted," he said. "This survey also affirms that the community banking model of small-business lending remains highly competitive in today's financial market, and is still vital for our communities."
The agency carried out the survey in 2022, and received responses from over 1,300 banks, representing the vast majority of the banks that engaged in small-business lending in 2021. The SBLS collected information on small-business lending practices, including loan approval processes, underwriting, use of financial technology as well as competition.
The study found that despite the shifts in the way many Americans interact with their banks — using banking apps over visiting physical branches, for example — small-business lending has largely kept its emphasis on personal relationships and physical interactions, even in the wake of the COVID-19 pandemic. Human oversight is a crucial component of most small-business lending, as the study found only 3% of banks fully automate their underwriting process.
The enduringly "old-fashioned" nature of small-business lending however, has not stopped banks from adopting new technologies. Thirty-one percent of banks of all sizes reported that they relied on some kind of financial technology service in at least one stage of their small-business loan procedure, while another 22% said they are considering integrating fintech.
The importance of human interactions were also highlighted. Only 5% of banks surveyed allow borrowers to complete the loan process virtually and a majority of banks require customers to visit a branch to complete the loan process.
Small-business lending also remains highly local; on average, the study found banks lend to businesses within 40 miles of their branches.
"Banks report the reason for not lending outside their geographic market to be largely related to forming those essential relationships with potential small-business customers," said Gruenberg. "Nearly all banks emphasize high-touch, staff-intensive practices: Over 90% of banks say they participate in community events or ask staff to actively develop business relationships and share their expertise."
Community banks in particular demonstrated a unique flexibility in their lending models as a result of close relationships with borrowers. Unlike large banks that rely heavily on credit scores and standardized data, community banks leverage "soft" information — such as personal assessments of an applicant's character and business plan — gathered through direct interactions to inform lending decisions.
"Small banks are nearly twice as likely as large banks to use the loan officer's assessment of an applicant as part of their underwriting process," said Gruenberg. "For a loan of $250,000, they are more than twice as likely to consider the applicant's business plan than large banks."
Community banks were also far more likely to hold meetings between decision-makers and small-business applicants, providing real-time qualitative evaluations that highlight strengths that credit scores and other financial data might overlook. The FDIC official said such practices grant community banks more flexibility and responsiveness in lending, which large banks often cannot match. While large banks tend to rely more heavily on the Small Business Administration and other government-guaranteed lending programs in order to make loans to startups, small banks were more likely to underwrite loans to startups using information gleaned in meetings and less prone to seek a government guarantee.
Gruenberg said such results indicate the community banking model of small-business lending is vital and remains competitive in modern banking.
"These critical ties to small businesses have survived the coronavirus pandemic, successfully navigated last year's banking industry turmoil, and continued to adapt to a changing competitive landscape," he said. "These comprehensive underwriting practices that set community banks apart [are] worth preserving and supporting … a failure to do so would undermine an essential pillar of our economy.
