Small Business, Big Business – Lessons From Online Lending Trends

Each April, the New York Federal Reserve releases a survey of business owners’ borrowing preferences. Surveys conducted over the past three years specifically highlight both the challenges and the opportunities that community lending institutions have in competing with unlicensed online lenders. Below are four key points from the 2019 survey.

Preference for online origination is increasing

Over the past three years, business owners have shown a growing preference for streamlined online insider loan origination. While banks still retain a competitive advantage, the trend is clear for online lenders.

The speed of credit decisions remains the main driver of this online preference

The New York Fed’s investigation found that the main benefit commercial borrowers see with online lenders is the time it takes to make a credit decision. This is followed by the perceived likelihood of being funded, as online lenders have historically higher approval rates.

Interest rates and loan structure remain the main reasons why banks remain the preferred source of loans and lines of credit

While wait times are the most common complaint from borrowers about banks, interest rates and payment terms are the main objection of online lenders. Of course, the rates depend on the credit quality of the facilities as well as the cost of funds incurred by online lenders.

We expect online lenders to compete more effectively on price in the years to come, especially for relationships that offer better credit quality. Although it depends on their own access to capital, the trend towards the use of more efficient technologies helps to reduce their operating costs.

The next few years are important in determining the path of online lending

Data from these surveys indicate that chartered financial institutions still have the advantage of attracting corporate borrowers, but online lenders continue to gain ground. The best way forward for banks is to build on their strengths while trying to eliminate those weaknesses. Many financial institutions have taken this route in recent years by starting to offer streamlined application processes using both web and mobile technology. Through this route of online loan origination, they have effectively eliminated the reason that creditworthy borrowers turn to online lenders.

The worst mistake banks could make is to ignore these trends. Remember, we’ve seen similar trends in the past related to consumer loans and mortgages. Commercial loans continue to be a major revenue driver for banks of all sizes. Now is the time to protect your territory by offering some of the same streamlined origination options that your competition uses to drive business away from you. If banks can do this while providing the same level of personalized service they are known for, their chances of success will be even greater.

This is the main opportunity. Today’s lending technology can seamlessly complement banks’ current underwriting practices and workflows, enabling them to effectively offer the best of both worlds and be more competitive.

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David A. Albanese