Loans to merchants can help small banks fight fintechs

Community banks and credit unions are under pressure from increased competition from a new category of lenders. It is no longer enough to provide better and more personalized service than the other bank in town. Landing – and increasingly, retaining – small businesses now means going up against lenders Square, Stripe, Amazon, eBay, even UPS.

Fintechs are changing the rules of the game, and it’s incredibly disheartening for community banks and credit unions that don’t have deep pockets and the thousands of staff at much larger companies.

According to the U.S. Federal Reserve’s 2019 and 2020 Small Business Credit Surveys, the percentage of small business credit applications filed with community banks fell 23% from 2016 to 2019, while the percentage going to lenders online grew by 73%. For community banks and credit unions, that means the competition isn’t just at the door – it’s already lunching.

Then came the pandemic which reinforced the need for small businesses to quickly adapt to digital ways of doing business. Now they needed to be equipped for online ordering (if they didn’t already have it), online returns, integration with a third-party delivery platform, and contactless payments to name a few. some. Today’s small business owners expect their community bank or credit union to provide the same level of convenience in the lending process.

So how can banks and credit unions improve their traditional lending processes to deliver the efficiency and convenience business owners want?

Merchant transformers – companies like Square, Stripe, and others – have also branched out into small business lending because of the low cost of entry. However, this perk only tells part of the story. What has largely brought merchant processors into the lending game is the drastically unmet need for working capital in small businesses. According to a December 2020 Biz2Credit survey, small banks approved only 18.3% of non-PPP business loan applications in November 2020, up from 50.5% in November 2019.

So evenbeforeDuring the pandemic, nearly half of SME customers were turned down by their own banks for a small business loan. Enter COVID-19, and banks and credit unions are still not keeping up with the growing 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 the competition. Community banks and credit unions can look to merchant processors asthe partners, not competitors, to meet digital demands.

In addition to a low cost of entry, merchant processors have three key advantages when it comes to capital expansion:

Real-time data access. While traditional financial institutions rely on various financial reports to assess creditworthiness – including last year’s tax returns and owner’s assets – merchant processors tap into real-time data such as cash flow. . These up-to-date metrics enable smarter, less risky and more efficient lending decisions.

Pre-approvals. Real-time data also gives merchant processors the ability to select ideal lending clients and offer pre-approved loans even before a client decides to initiate the process.

Fast delivery. The whole process of lending to merchants consists of only three stages: pre-approval, acceptance of conditions and disbursement of capital. The streamlined and automated approach means small business owners can access capital in less than 24 hours.


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