Prevent attrition and win new relationships with loan options
The following is a guest post from Tucker Mathis, the CEO of FINSYNC, a consolidated cash flow management platform focused on helping businesses grow. Mr. Mathis has dedicated nearly 20 years of his career to the fields of software and lending, helping companies to raise capital and better drive sustainable business results. FINSYNC’s intuitive online tools help automate payments and accounting, and provide valuable insight through cash flow analysis. FINSYNC’s lending network gives businesses access to fast, affordable financing. Connect with Tucker on LinkedIn and follow @FINSYNC on Twitter.
How risk-averse banks can prevent attrition, protect deposit business and build new long-term relationships by offering small business clients lending options.
Capitalize on SMB relationships
In the current small business banking landscape, demand for loans is up while the competition to win deposit business is intensifying. Protecting existing relationships and building new ones is more important than ever.
“Robust demand for new loans is obviously good news for banks, but finding cheap deposits to fund those loans is arguably banks’ greatest challenge these days … deposit growth at many banks is unable to keep pace with loan growth.”
The bank that holds the primary credit relationship with a small business generally wins the deposit business as well. Banks that shy away from “risky” small business loan applicants are missing opportunities to build long-term relationships and capitalize on them by winning deposit business and beyond.
At the same time, banks that deny their current small business clients loans risk losing the relationship (and deposit business) to a lender that’s willing to extend them credit. Gone are the days of blind loyalty to a bank.
Deposits are in decline
According to the ABA Banking Journal, the growth rate of small business deposits across U.S. banks and credit unions is the lowest it’s been since 2014 at just 3.3 percent. Small banks are being hit especially hard. While deposits are declining, funding costs are rising.
American Banker reports that deposits at small banks (with less than $10 billion in assets) dropped two percent last year, including a five percent decrease in non-interest-bearing deposits. At the same time, funding costs increased by 21 basis points to 0.71 percent.
At smaller banks (with $1 billion or less in assets), total deposits fell by 7.5 percent from 2013 to 2017.
Increased competition for deposits
“[Competition for deposits is] a steel cage match, wrestling. I haven’t seen it this competitive in my lifetime. Lots of deposits and the lack of liquidity out there makes it very, very difficult.”
-Joseph DePaolo, CEO Signature Bank
There’s competition across the board for deposits among banks and credit unions. Small banks are up against large banks with extensive branch networks, while all brick-and-mortars face competition from online-only banks with enticing interest rates.
From June 2017 through June 2018, online banks with high interest rates like Synchrony Bank increased deposits by 11.5 percent, Ally Financial by 16.2 percent and Goldman Sachs by 20.6 percent.
What’s at stake, of course, is both the ability to make loans and pay for them. Fewer deposit accounts can lead to liquidity issues.
“Prior to 2000, nearly every small business used a single financial institution. Today, only about one-third of small businesses are loyal to a single institution. One-fifth have four, or more, financial providers.”
As recently as five years ago, banks could generally count on loyalty from their small business customers. In 2013, a Deloitte study found that the majority of small businesses had been with their primary banks for more than 15 years.
Today’s small business owners have more banking options than ever, and they’re much more likely to move their business to meet their needs. If rejected for a loan, it’s easy for SMBs to look elsewhere — and just as easy to move their deposit accounts.
Along with more options come higher expectations. Small businesses have become less dependent on traditional banks as their online counterparts have started to offer higher interest rates, fill lending gaps and simplify the loan application process.
Boston Consulting Group (BSG) research shows that corporate banks annually lose 10 percent to 15 percent of gross revenues to attrition.
Losing valuable customers can be as costly for banks as acquiring new account holders. When it comes to attrition, many banks only track complete exits. Gradual and partial defections are more difficult to spot, and significantly more costly.
According to BCG, full relationship exits account for one percent to two percent of gross revenue loss. More gradual defections (when clients close a few accounts, stop buying some products or reduce the amount in their portfolio) account for 9 percent to 13 percent of gross revenue loss per year.
Small business clients are increasingly looking to alternative lenders for financing. There are numerous draws for SMB clients: a fast and easy application process, quick funding, and a higher chance of being approved for a loan.
According to the Federal Reserve’s Small Business Credit Survey, the main reason clients applied for funding from an online lender was the speed of decision / funding (63 percent) followed by a better chance of being funded (61 percent).
“Traditional lenders risk being left behind if they do not match the faster processes that many online lenders offer.” –American Banker
The number of small business owners who turn to alternative lenders for funding has increased steadily since 2016.
According to the Federal Reserve’s Small Business Credit Survey, online lenders have approved more small business loans than small and large banks for the past two years.
Build and protect SMB relationships to compete
“Increasing competition for deposit dollars at a time when the overall deposit pool is expanding only modestly will heighten the importance of relationship building skills to find and retain deposits.”
At a time when attrition is on the rise and small business owners have more banking options than ever, banks of all sizes should reexamine their position on small business lending. At stake is the opportunity to build new relationships (and win deposit business along with the loan account), and the possibility of losing existing clients who are denied for a loan.
Leverage the power of a fintech partnership
There’s good reason why the industry has seen a recent proliferation of partnerships between traditional banks and fintechs. Online lending networks like FINSYNC can expand banks’ online capabilities and make it easy to both connect with new clients and nurture existing relationships.
Traditionally, financial institutions have faced many challenges when extending small business loans, including documentation, compliance, cost and underwriting. Partnering with FINSYNC can remove many of these obstacles.
Banks can embed FINSYNC’s loan application into their website in order to offer existing clients a faster, easier loan application experience. Banks benefit from a streamlined underwriting process and lower operational costs.
Partnering with FINSYNC can also help banks prevent attrition. If a FINSYNC loan client lists a member bank as their primary business checking account, the loan application will be routed directly to the bank on a first right of refusal basis.
When a bank decides against extending a loan to a small business client, regardless of channel, banks that partner with FINSYNC have an opportunity to preserve the relationship. By turning on FINSYNC’s lending network, banks that are unable to extend loans due to minimal history, lack of collateral or any other reason can provide a financing solution via referral. Not only does this preserve the bank’s relationship with the client, the bank earns a referral fee.
Relationships have never been more important for banks and their small business clients. Partnering with FINSYNC is a simple way to win new business and deepen existing relationships for the long term.