Community banks and credit unions are feeling the pressure of increased competition from a new class of lenders. It’s no longer enough to provide better, more personalized service than the other bank across town. Landing—and increasingly, retaining—small- business customers now means facing off with lenders including Square, Stripe, Amazon, eBay, even UPS.
Fintechs are changing the rules of the game, and that’s incredibly daunting for community banks and credit unions that lack the deep pockets and thousands of staff members that much larger companies have.
According to the 2019 and 2020 U.S. Federal Reserve Small Business Credit Surveys, the percentage of applications for small-business credit filed with community banks dropped 23% from 2016 to 2019, while the percentage going to online lenders rose 73%. For community banks and credit unions, this means competition isn’t just on the doorstep—it’s already eating their lunch.
Then came the pandemic that reinforced the need for small businesses to adapt quickly to digital ways of doing business. Now they needed to be equipped for online ordering (if they didn't have that already), online returns, integrating with a third-party delivery platform and contactless payments, to name a few. Today, the expectation of these business owners is that their community bank or credit union ought to deliver the same level of convenience in the lending process.
So how can banks and credit unions level up their traditional lending processes to deliver on the efficiency and convenience that business owners want?
Merchant processors—companies like Square, Stripe and others—have also jumped into small business lending because of the low cost of entry. However, this advantage only tells part of the story. What largely ushered merchant processors into the lending game was the drastically unmet need for working capital among small businesses. According to a December 2020
So even before the pandemic, almost half of SMB customers were being turned away by their own banks for a small business loan. Enter COVID-19, and banks and credit unions are still not keeping up with the surging demand for capital.
There is no going back now. It’s time to take a second look at some of the companies you might have thought were competitors. Community banks and credit unions can lean into merchant processors as partners, not competitors, to keep up with digital demands.
In addition to a low cost of entry, merchant processors have three key advantages when it comes to extending capital:
Access to real-time data. Whereas traditional financial institutions rely on various financial reports to evaluate creditworthiness—including last year’s tax returns and the owners’ assets—merchant processors leverage real-time data such as cash flow. These up-to-the-minute indicators make for smarter, less risky and more efficient lending decisions.
Pre-approvals. Real-time data also gives merchant processors the ability to screen for ideal lending customers and to offer pre-approved loans even before a customer decides to initiate the process.
Speed of delivery. The entire process of merchant lending includes just three steps: pre-approval, acceptance of terms and disbursement of capital. The streamlined and automated approach means small-business owners can access capital in less than 24 hours.
