By Lindsay Torrico and Alex McLeod
Without a doubt, small businesses are the backbone of our local economies. As the holiday season approaches, consumers will show appreciation for local businesses on Small Business Saturday, the last Saturday in November, and throughout the season.
Despite this support, small businesses continue to be challenged by access to capital. Perhaps most concerning is that women and minority small-business owners — who are driving a historic boom in new startups — are less likely to obtain funding through financial institutions or lenders.
Banks can help small businesses bridge the capital gap. The key is to deliver customer experiences that are both high-tech and high-touch. In turn, small-business lending offers financial institutions an opportunity to attract new deposits, increase revenues and strengthen their balance sheets.
To enable this, here are three strategies for banks to boost small business market share:
1. Begin with the small-business customer journey in mind
To design a winning small-business lending program, banks first must define the desired small-business customer experience. That includes setting loan growth targets, mapping the end-to-end origination value stream, identifying the gaps in their current technology stack, determining key decisioning points and eliminating silos among origination, underwriting and closing teams. After mapping these value streams, banks then can design customer journeys that provide a high-tech and streamlined experience. Technology solutions, including the use of artificial intelligence, can be introduced to enable a user-friendly digital native experience. These solutions can simplify application forms, simplify information gathering using financial technology applications, create self-service online portals and incorporate automated scoring tools and credit risk models.
Banks can either build, buy or co-create these solutions to deliver a winning value proposition to their customers (after, of course, running the necessary compliance and risk checks). These steps set conditions for banks to thrive in the small-business lending space, by making the underwriting process more sustainable, more data-driven and more economical.
2. Cultivate relationships and become a trusted adviser
While technology can enable many efficiencies through automation, this is not sufficient on its own. Small businesses also seek advice from their banks, including insights on how to improve creditworthiness. Small-business owners who receive advice and support from their bankers are more likely to apply for credit and use other services offered by banks such as cash management and lines of credit. In this manner, small-business lending becomes an entrance point for banks to nurture and grow more profitable customer relationships.
Community banks in particular can shine by training loan officers and relationship managers to position themselves to be the go-to resource for their small business applicants. In addition, several new financial technology companies have emerged to support bank staff in delivering these capabilities, allowing them to scale their personal touch while leveraging best-in-class loan insights and small-business analytics. Digitization can help achieve relationship banking through new channels, not just at the branch.
Loan officers and relationship managers can also consider sharing credit criteria and industry averages with applicants, explaining which factors are most important in loan applications and providing constructive feedback for unsuccessful applications. Providing a “not yet” instead of a “no” can keep applicants in the bank’s pipeline, offer reconversion opportunities down the line and provide a source of deposit and cross-selling growth for the bank.
3. Establish inclusive programs designed for underserved segments
Banks can ensure they are the partner of choice for small-business owners by designing programs to specifically meet the needs of underserved small businesses. Several banks have successfully implemented inclusive lending programs to great effect, such as Live Oak Bank’s Inclusive Program, Huntington Bank’s Lift Local program and Zions Bank’s Special Purpose Credit Program.
These banks all understand that while technology can streamline processes, winning in this space requires providing personalized programs for underserved small-business owners. (Check out ABA’s Special Purpose Credit Program hub for case studies and guidance on getting started: aba.com/spcp.)
Going a step further, banks can integrate small-business financial education and technical assistance in their programs. Many community development financial institutions have successfully incorporated financial education in their programs, such as Southern Bancorp’s Minority Business Empowerment Program. These programs demonstrate the bank’s commitment to the growth of small businesses and foster economic development in underserved communities.
Looking ahead
Banks can leverage small-business lending to drive deposits and customer growth by focusing on three strategies: reimagining the customer journey through technology, prioritizing relationship management and creating inclusive programs for underserved segments.
This approach not only addresses long-standing challenges with access to capital for underserved communities, but it also builds a pipeline of core customers for the future, cultivates trust and out-competes online lenders.
Lindsay Torrico is executive director of the ABA Foundation. Alex McLeod is founder of Parlay Finance, a fintech that enables lenders to increase small business lending through an AI-powered loan intelligence system.
