What you'll learn
- How to think like an enterprise bank and optimize where your bankers/underwriters are spending their time
- Best ways to leverage digital fraud capabilities while still maintaining a best in class customer experience
- Best practices around a crawl, walk, run approach to scaling your SMB lending program
Transcription:
Chana Schoenberger (00:10):
So this panel is called SMB, lending is Broken and here's how to fix it. So real answers and I have with me Kamal Rajan who is the Head of Business Products and Services at Golden 1 Credit Union and Eric Lee who is the Vice President of Product at Amount.
(00:27):
So this is kind of a provocative title. Do you guys want to just start off by explaining what it is you think is broken about SMB lending?
Kamal Rajan (00:37):
Would you like to start?
Eric Lee (00:39):
Yeah, I can start think if I think about the two sides of lending on small business. I think we all know how important small businesses are in the United States. I think if you look at numbers post COVID as well, in terms of number of net new businesses that are starting in the United States, I think it's 50% higher. I think the numbers, recent numbers saying it's 450,000 new business applications every month. If you think about it, it's like 99.9% of companies in the US are small businesses. So it's really the engine of our economy. And then capital or lending capital is really the fuel. If you look at a lot of the surveys that's out there, numbers don't, don't look great. You see numbers like 75% of small businesses are not able to get the capital that they need and it's having a huge impact in terms of how they operate their business.
(01:47):
And then I think even higher number think that either the interest rate or the options that they have is negatively impacting how they're able to do business. And then on the other side, if I think about obviously amount, we partner with banks and credit unions all around the US in terms of their digital readiness of the small business lending, whether it is, we see a huge gap between consumer lending product as well Compare that to small business in terms of readiness. We see that much lower as well as higher expectation from small business owners and what they expect in terms of digital experience. We think there is a big gap. So that's kind of the context of provocative and title in terms of why we think SMB lending is broken.
Kamal Rajan (02:40):
And I would say also that there's a myth that a lot of these companies are just starting off. There's a big chunk of 'em or the average age of a small business owner is between 15 and 60 years old. They're already banking somewhere and these companies that want to start up have a very thin credit file and so you attract them digitally and you can't underwrite 'em and it's really a bad experience. So you got to figure that one out too. And then a lot of times with digital solutions, they've tried big banks, they got declined, and you end up getting poor credit scored people that come to your digital solution. So part of it has to be a hybrid between working with the physical channels and physical distribution and attracting them to your digital platform to solve some of these issues.
Chana Schoenberger (03:26):
So somewhere there are these magical unicorns of small businesses that are extremely bankable but don't have a bank. How do you find those?
Kamal Rajan (03:37):
Well, I would argue that most established businesses already are buying the products they need at another bank, and our strategy is to dislodge that relationship.
Chana Schoenberger (03:46):
So you have to be better than their existing bank.
Kamal Rajan (03:48):
You start with a lead generation product of cash back on your credit card or $500 for opening a checking account. But the person from TD Ameritrade, if you're not selling the full product set at acquisition, you're going to miss it. Right?
Chana Schoenberger (04:03):
Yep, that is true. Okay, so tell me about Golden one a little bit. Where does small business fit on your list?
Kamal Rajan (04:11):
So as a credit union, traditionally we haven't done that before and a lot of 'em are starting to do that. And it's interesting because the perception of a credit union is community based. And I always argue that if you want to help the community, you got to help small businesses. So
Chana Schoenberger (04:27):
It's the same people. The members also have businesses.
Eric Lee (04:30):
That's exactly right in the community and a lot of them do have businesses in the community. And so we will be attracting a lot of those through our channels. But what we're trying to do is really play that community card in a big way from a credit union standpoint. One of some of the research that Barlow had done in California, for example, shows that Bank of America, Wells Fargo and Chase are actually losing share in the small business space and community and credit unions as a whole are increasing. Looking at this for the first time, I didn't know that a credit union could do all this. So I think a lot of credit unions are scrambling to build the full products as we are.
Chana Schoenberger (05:13):
Okay, interesting. And so you decided to do this partially, digitally. How'd that work?
Kamal Rajan (05:21):
Well, we were partnering with Amount and we are a strong believer of physical distributions. We have branches which we're proud of and we want to do more of 'em.
Chana Schoenberger (05:32):
How many branches do you have?
Kamal Rajan (05:34):
About 70 right now. And we have strategies to expand that. And so
Chana Schoenberger (05:39):
How does that work? If I am a member, I walk into a branch, how do I become aware that you could lend to my small business?
Kamal Rajan (05:47):
So we do digital advertising, banner ads, et cetera, and they come to our website and they can apply there for those that want to, but you're going to get a lot of 'em that that's neat. But I'm going to walk into a branch with Mount. We have a great partnership that we can emulate that high touch experience with the digital backend so they can walk into the branch, the personnel at the FT can take their name address, start the digital application and they can continue on their own or we can follow up with a phone call or have one of our small business advisors contact them and really give them that high touch experience even though the backend is digital. And that's what we really love about partnering with them out.
Chana Schoenberger (06:26):
And how does this work from your end?
Eric Lee (06:28):
Yeah, so we think about especially small business, we've talked a lot about meeting the small business owner where they are and some of it is physical going into the branch and wanting to have that experience. And then another is also time of day. If they're running a small business, they can take hours away to go into a physical branch. So it's really about options giving them a seamless option between digital and digital and in-person experience. And we certainly don't want to have it where being in a FinTech always talking about digitalization and digital experience, but I think it has to go in hand in hand with digital experience as well as really leveraging one of the best assets you have, which are people in the branches who know the community. And there's a reason why smaller community banks and credit unions over index in terms of their exposure on the small business. Because if you think about small business lending, from my perspective, two really key important aspects to have a successful lending program. One is out of member experience or customer experience application experience, and second one is first party data and having additional data points that you can underwrite these small businesses better than just pure online lenders out there. So I think that's really important in terms of making sure that you give them the flexibility both in terms of location channel and being able to really serve the business owners where they are.
Chana Schoenberger (08:04):
So when I interview a bank executive, which I do all the time from a bank or a credit union, big small, anywhere across the spectrum, and I ask them what does it take to win the customer? They always say the same thing, which is we are local. And you hear this from people who work for the biggest banks, we're local and we understand the community, we understand the customer, we know what they want. So how does this work on this sort of physical digital nexus for you?
Kamal Rajan (08:30):
Well, I think this idea, I've been in this space of very long time and this idea that bankers in the small business business banking space are trusted advisors. That's the furthest thing from the truth. The average tenure of a banker is 18 to 24 months and then they change bankers all the time. Their trusted advisors are really their CPAs and insurance brokers. So what they're really looking for from that being local is someone that understands their cashflow and credit and cashflow needs and then goes back and navigates the bank with products and solutions and brings 'em back, whether it's digitally or with manual underwriting or whoever that is, but understanding that cashflow and being that advocate. Now, what separates business banking, small business from commercial is a professional buyer. It's not the sales size. As soon as they get a professional CFO, they don't need the branch. They know what they're buying, they're negotiating on treasury prices and lending. But when the owner's, the buyer, they don't know what they're buying and they look to the banker to navigate the bank and be their advocate. Delivering that both digitally and through regular channels is I feel the key.
Chana Schoenberger (09:40):
What is the level when they will hire A CFO? How big does the business have to be?
Kamal Rajan (09:46):
I don't think it's a sales size. I think when they're as an actual professional CFO,
Chana Schoenberger (09:50):
But at what point?
Kamal Rajan (09:51):
About 20 million.
Chana Schoenberger (09:52):
20 million?
Kamal Rajan (09:52):
Yeah.
Chana Schoenberger (09:53):
Okay. So that's when I'm going to hire a guy and he comes in, goes to meet with my banker, and all of a sudden he knows what he's talking about.
Kamal Rajan (09:58):
That's right.
Chana Schoenberger (09:59):
Whereas I had no idea A baker or something.
Kamal Rajan (10:01):
That's right.
Chana Schoenberger (10:03):
Okay. Okay. So talk to me about generational differences, right? So you were talking about the average age of small business owners is in their fifties or sixties.
(10:14):
We're seeing a lot of these gig economy businesses open up now, especially since the pandemic we were talking about this morning. And there are many people who you want to be a social media influencer or have a life coaching business and it's like we all laugh at that, but that is a real business. You can make millions of dollars doing that sort of thing and you will need a bank to help you.
Kamal Rajan (10:33):
Yes, you got to meet 'em where they're at. So let's say if I'm an ABC tire company with three locations and my parents are running this and now I'm the next generation taking it over and then they're doing all their accounting and payables with post-IT notes and all this. Just because you show up with the digital invoicing doesn't mean they're going to change that.
(10:52):
So this idea that you have digital solutions and they're going to adapt to you is tough because running their business, getting customers running and doing all that, their transition is really up to them. So I think part of the solution is meeting and understanding their cashflow, how they do payables and receivables and slowly bringing into them the digital solutions that are there for that. But this idea that all of a sudden millennials taking over a business and they're going to change everything to be digital, they're barely trying to understand their business when they take it over.
Chana Schoenberger (11:26):
We had a payments forum, which is another of the American maker conferences last year we had an executive get up and talk about how she ran a large group at a bank that dealt with middle market businesses. And there was one of her clients who had, I dunno say it's 300, $400 million manufacturer. And his fraud procedure was that he personally went down to the accounts payable department, sat at a desk and personally signed every check. And if he did not know the name of the vendor, he would pick up the check, walk over to the hunting person's desk and say, who is this and why are we paying them? That's right. And she could not convince him to go digital even though she had a digital portal available that would allow him to do all of the vetting himself and he still would've had that control. He said, I am the last line of defense here and we are not going digital as long as I run this company.
Kamal Rajan (12:20):
You need positive pay. So if you know what positive pay, it's a lot easier to do what you're saying. And I think you need a person to really show you how that works to be able to stop checks and repay them like you write a check and they change it to a million dollars from a thousand and being able to stop that real time, that's probably one of our best products that we're going to have to launch because there's a lot of fear and there's a lot of loss around that. Yeah,
Chana Schoenberger (12:45):
Fraud is a thing.
Kamal Rajan (12:46):
Yeah.
Speaker 2 (12:47):
That's very big problem with the digital banking world.
Kamal Rajan (12:50):
That's right. The other thing around digital is it's easy to start an application or a credit card or a loan or a checking account or even an MMA, but it's really hard to dislodge your relationship digitally. You need someone to talk to them and earn their business like we talked about, like Todd had talked about getting into the community, understanding them. That's really difficult to do digitally, but that experience can be enhanced digitally. Starting that conversation then collecting all the documents digitally through the platform is really powerful. And being able to do that choreography I think is one of the keys.
Eric Lee (13:34):
Something to add in terms of talking about digital experience, how we think about it from building product as product builder, it's not just trying to automate as much as possible. I think there is a little bit of a nuance that, especially on small business lending where it's really giving the option for those automations. So we talk about whether it is a credit rule or fraud rule or rule that's trigger in terms of giving the option to automatically make that decision based on score only or score plus bank statement or it goes to a manual pen where in a lot of times when we look at lenders, our partners really starting the program, a lot of times they start with want to say yes to as many people as possible and these are relationships. So they're going to put that into a pen Q for someone to take a look at, which I think is really important where just digital experience doesn't mean just pure automation. It's ability to have that dial and have that option to make it automated or manual as a C fit that meets their business need, their community need and how they want the goals that they want to accomplish. So I think there is a lot of nuance in terms of digital experience and automation, especially for small business lending.
Chana Schoenberger (14:55):
Okay. So talk to me about the importance of customer service. This is one of the things that we discussed when we were talking about this previously. Obviously it's important that the customer come in to the branch or call and be able to feel like the bank is answering his questions. But how are you guys dealing with this?
Kamal Rajan (15:18):
So I've challenged our leadership to rethink the purpose of the branch or physical channels from a cost center to a marketing spend. So if the branch was a marketing spend, not dissimilar to an Apple store, apple doesn't need an Apple store, they do most of their sales digitally, but there's a reason for it.
Chana Schoenberger (15:37):
Credit Union Genius bar?
Kamal Rajan (15:39):
Yeah, probably. Yeah. And this idea that at certain points in the relationship, whether at acquisition or upsell or advice, you need to talk to someone whether that's a centralized call center at the branch or somewhere. And here's where I think the important thing that we all need to realize is we need to redefine what digital means. If you've earned their full relationship and you're the primary bank, you have their operating accounts, you have loads of non-interest bearing deposits, most of their transactions are going to be digital, they're operations, but they do need that period of time when they want to come in and talk to someone because they're in the community. The branch represents the community that is important. And this idea of physically thanking them for walking in, thanking them for being a member is critical. I always say that we spend a lot of money in digital advertising banner ads just to get a click right, an impression. But when they're in your branch, you've got a captive audience and shame on you if you're not thanking them and working on them and expressing to them all the solutions that you have. So I always like to rethink that. Physical distribution is a differentiator for those that have it.
Chana Schoenberger (16:56):
So is this a question of training the people in your branches to interact differently with the customer? Different signage, what are you guys doing?
Kamal Rajan (17:02):
Yeah, we have things like product selectors that quickly ask them basic questions. How do you spend, do you take checks? Do you take more than 5,000 cash? How do you receive funds? And then quickly triage them. This is a complex customer that does international wires. This is one that's pretty simple that only takes deposits. This is one that there's a trucking company that spends on their corporate card and you can really triage when you need to have a relationship manager call or send them directly digital to start the application. And that's what everyone's afraid of is like I can't train all my tellers to talk about business, but if you give them the tools to triage 'em, it could be pretty easy.
Chana Schoenberger (17:47):
Do you wait for someone to say the magic word business when they walk in? Or do you ask everybody who comes in, can we help you with your business thinking as well?
Kamal Rajan (17:57):
I mean there are some keywords you look for, but we don't do it on purpose. No.
Chana Schoenberger (18:02):
Is that something you would start doing?
Kamal Rajan (18:04):
Possibly, yeah, I think so. I think when it's appropriate.
Chana Schoenberger (18:08):
Okay. Eric, tell us what you're seeing in terms of this idea of speed to fund. How quickly can we get people their money?
Eric Lee (18:19):
So actually I spent most of my product career in consumer consumer lending and past few years I've been focusing on small business. And in terms of cost to fund, obviously much in average, much shorter on consumer, if you look at full automated all the dials to really optimize program, we can see it same day application approval and the next day funding is something that we see and a lot of even the technology that we have on the consumer side on credit card, we have consumer credit card that can be approved within 10 minutes and then instantly provision where they can add that to their Apple wallet to use in the same day. In terms of technology, it's certainly there. It's also obviously not the same in terms of consumer and small business. So it's really around there is additional kind of fraud risk that you have to think about. So in terms of technologies there, we give the tools and option for our clients and our lenders to control that speed. And there are some additional onboarding that you may want to do. Golden one is doing and making outbound calls after they become a member to have that conversation. So it is not, it's not a technology limitation, it's all around business processes and how they want to do it, but funding can be kind of next day funding.
Chana Schoenberger (19:47):
So can you guys give me a lightning round very quick explanation of how you started working together? What was the implementation, what went wrong and how you fixed it, something has to have gone wrong.
Eric Lee (20:00):
Yeah, I mean in terms of what we talk about a lot in terms of standing up a program, there's always something that goes wrong. We think about crawl, walk, and run in terms of how we do implementation. So I think there are a couple stages. One is just in terms of general program setup, that's where you kind of know all the vendors that are out there. Not just in terms of credit sources but also fraud vendors. We really focus on how do we go into market and have this conversation where we can go into the market with a curated list of vendors we think are best in class so that you're not looking at a hundred, 200 fraud vendors and trying to piece together what are the best data sources you want to use. So there are certainly challenges there working with a lot of these vendors on whether it is contracting or whether it is credential.
(21:00):
So there are certainly some hiccups there, but we really try to get to create a list. And then the other point where in terms of crawl walk, where we see a lot of challenges are onboarding to the core system. That's where in the crawl stage we have partners where we start with just manual onboarding. You're only doing a very small number of origination per week. We can create a manual boarding file, then you can do it. And then as you scale and grow, we look at automated onboarding through an API or kind of other means. So those probably two pieces are having done a lot of these implementation for the past 10 years, those are probably two where third party vendors involved. And then onboarding to the core where we've seen issues.
Chana Schoenberger (21:57):
And when did Golden one start this process?
Kamal Rajan (22:00):
They started a few years ago with commercial real estate, but now we're really going into our deposit suite and credit card launching in November 10 products and services at the same time, which is interesting and I think it's okay to fail and it's okay to not be perfect, but the idea that we're on this journey together with our members is something we do. Who gets the least malpractice lawsuits? It's not the best doctors, it's the ones with the best bedside manner.
Chana Schoenberger (22:36):
That's true.
Kamal Rajan (22:37):
And so our strategy and messaging and value prop is really we're on this journey together to help our community members succeed in their business. If you look at a lot of the research from Barlow and others, a big chunk of the market share is with small community banks. It's not because of their digital capabilities.
Chana Schoenberger (22:57):
Right, right. Yeah. I am always asking people, the flip side of that is I'm always asking people, why did you choose the bank that you chose? And the answers are really interesting,
(23:11):
Get a real variety of reasons and occasionally you'll find someone, I mean most people bank with banks, but there are millions of people who bank with credit unions and sometimes it's because they happen to have a credit union at their first job or because their parents are,
Kamal Rajan (23:28):
It's an emotional connection,
Chana Schoenberger (23:30):
Always an emotional thing. But of course when they're there, they do need the same products as everybody else.
Kamal Rajan (23:35):
That's right.
Chana Schoenberger (23:36):
You have to give 'em that stuff.
Kamal Rajan (23:39):
I just want to say it's understanding when you use digital and when not to is really up to them. They got to bank when and where they want. Right, right.
Speaker 2 (23:47):
Okay, last question and then we're going to take some questions from the audience if anyone has 'em. So get them ready. What is the thing you would, what's on your wishlist to change about the way that you do digital right now?
Kamal Rajan (24:04):
So we're partnering with them to do multi-product applications. So a single application that would qualify you for credit card checking account conditionally based on the questions to do it all at the same time so you don't have to keep going back and starting over. And amounts done a good job with minimizing the number of questions and all that. But my wishlist would be to sell solutions rather than individual products. If you think about when you buy a car, it comes with SiriusXM satellite. If you want to keep it, you have it and you subscribe to it. The same idea for your solution set for your business products, you need merchant services, checking account, credit card. It just comes with your application and when you're ready to activate it, you activate it. It's a different psychology than, Hey, you want to buy a checking account now or do you want to get a credit card now? And so that's where we're migrating to philosophically.
Chana Schoenberger (25:00):
Interesting. Okay, cool. Alright. Anybody have questions? If not, I have more. There's a mic. We'll bring it to you. Anyone here's your chance to get a real live credit union executive in the flash. Yes.
Audience Member 1 (25:18):
Hold on. How do you gentlemen think about the cross? So when you're talking about solutions as an example, the ability to cross sell and upsell, and I know SA sometimes comes off as a dirty word, but to get multiple, to empower your business customers, small SMBs with multiple products like a solution set, right? It's not just, hey, take this one-off thing for me, hey, and then I'm going to market this other one-off thing. How do you think of that in a more holistic manner, right? Across payments, lending, whatever it might be. Treasury. Treasury like type services.
Kamal Rajan (25:54):
And the first realization you have to have is they're already doing it at another bank or multiple banks. And what you're doing is dislodging that relationship. And so you start with the lead generation product of $500 cash back for $5,000 on your checking account or a cash back bonus. So adding products together at multiple product offers that have the criteria of earning those rewards based on activity. So for example, if you get a checking account, merchant services and a credit card at the same time you get a multiplier of your rewards. But the criteria is that you have to use that credit card and start the behavior of I'm going to pull this card out for my business so I can get the reward. All of a sudden they're setting up bill pay or automatic payments for their business and you're starting that behavior. So it's not just a matter of the churn game of, oh, I'm going to just put $5,000 in my account for 90 days and get $500. You want to really incent them to start the behaviors you're looking for and you got to do it at acquisition. And so the more we move to that model, we're seeing a lot, we're going to see, I believe, more results. I don't call it cross sells at wells for 26 years. I know it's a bad word, but you're providing solutions, right? And you're helping them with their needs, not just a product that you want to put in their wallet.
Chana Schoenberger (27:25):
Great. Yes.
Audience Member 2 (27:36):
Thank you for sharing your insights. Question is for small value loans, which may not be profitable for credit union or banks, but maybe needed by small businesses, how do you think about profitably serving the smaller segment of loans?
Kamal Rajan (27:54):
I would think that our lending is up to about, at first that line of credit up to a hundred thousand, up to two 50 and whatever value is in there, we've priced accordingly based on risk. So we're not going to do it like a $5,000 loan, but we do have a wide range of it. So I think based on risk, price, pricing and how we go to market, we do make it profitable. And for those of you that have small business portfolios or business banking portfolios, you would know that when you have the relationship, it's a net funds provider for the bank that funds consumer and all the other places in the bank. So I am not sure I understand your question. We're happy to do the small loans because like someone else said, they tell their friends and they tell their friends. And so at the end of the day, it's always helpful
Eric Lee (28:48):
From amount's perspective. We do hear that a lot in terms of especially as a dollar amount goes lower. Again, I think that is where digital really matters in terms of not being able to spend the same manual touches that you would do in a much larger commercial, even if it isn't all the way to commercial. I think that's really important to make sure that you're providing digital experience to keep that opex costs, especially when you're doing a much lower micro business loans.
Chana Schoenberger (29:20):
And then someday if they grow into a larger business, they'll remember how well you treated them.
Kamal Rajan (29:26):
That's right.
Speaker 2 (29:27):
And they'll still be happy with you. Great. Well that's probably all we have time for. Thank you so much Eric and Kamal. I appreciate it. Thank you. Thank you for coming up here. Alright.