On the state of SBA lending heading into 2024: Stephanie Dunn, Head of SBA Lending at Grasshopper Bank

As part of Tearsheet's inaugural Tearsheet Talks: Lending x Credit x Data, Grasshopper Bank's Stephanie Dunn, Head of SBA Lending, will share a forward-looking discussion on the state of SBA lending heading into 2024.

With over 20 years serving small businesses, Stephanie is a strong advocate and partner for a diverse set of main street businesses. She started her career as a Financial Advisor and Money Manager at Prudential Securities, and during that time discovered her passion for serving small business owners and providing them with thoughtful access to capital. She focuses on targeting niche industries using her deep-rooted industry expertise and passion for effective innovation to provide measurable value. Her career journey has taken her from Live Oak Bank to First Bank, and most recently prior to her role at Grasshopper, she launched the SBA practice at IncredibleBank.

In this talk, we discuss:

• How banks can best handle the rising demand for small business loans (demand is up even with interest rates skyrocketing)
• what technology they should have on the back end to enhance and facilitate the lending process
• how digital banks should be marketing their lending service and how they can reach customers where they are
• the role that AI can play in the lending process as we look for how that technology will be incorporated into financial services

Watch Stephanie's talk

Current outlook on SBA market

Stephanie Dunn, Grasshopper: I've always been a champion for small business. It's truly my passion. But I also believe it's the heartbeat of America, always has been, and I believe always will be -- thank God for that. And I think that the outlook is positive. I think the reason I am so passionate about serving entrepreneurs is they are nimble, they roll with the times, they roll up their sleeves, and they find ways to adapt. And that's what we've done since COVID. And that's what we'll continue to do moving forward.

I think COVID was an interesting period of time for us in the small business America. It really forced us to get out of a comfort zone that we had been in for a while, and we were coasting there for awhile. And life was great for a good period of time. But these corrections happen every decade or so. And we're in one of those corrections that just happened to come off the tail end of a global pandemic, which who would have ever thought, but here we are. It really just is one of those market corrections that the small business economy adapted during COVID, and is adapting to this new high interest rate, fast technology environment.

Demand for SBA loans

Interestingly enough, I expected a slowdown, but it has been the complete opposite. The small business demand has increased. I think there was a shift back to small business back to entrepreneurial spirit, from the work from home, wanting flex schedules, work life balance, spending more time with our families -- we've reprioritized our families and our lives, which I think was much needed. And that has really shifted to a more entrepreneurial spirit. And that is truly what was needed in this country. That's how this country was built. I think since that shift to entrepreneurial activities, demand has increased. I think the year over a year, if I'm not mistaken, increase in small business loans has increased well over 20%.

It's more small business activity, less big business because people want that flexibility or finally have decided I'm going to do what makes me happy in life. And oh, by the way, I can still earn a living and support my family. Great. So it's a shift in lifestyle, but then it's also just an increase in activity. I have for many years said that this country was at the very beginning of the largest transfer of wealth in our nation's history. But as we've talked about for 20 years now, the baby boomers are about to retire. We have a generation now that's ready to retire. We have the next generation that's ready to take over and we have new products available for the next generation now to afford being able to borrow money by mom or dad's business or grandpa's business. And so there's a big transfer of wealth. There is a changing of the guards in ownership and an increase in entrepreneurial activity.

What tech small businesses need

That's been the multi trillion dollar question, right? Well, the younger generation is much more technologically interested. I don't know about you, but when's the last time you had to deposit a check? And you drove to a bank, stood in line, and filled out a slip to talk to a teller? If someone says I have to do that, I literally would just dread having to do that. We have adapted now to a certain level of technology. And we're demanding even more now. We're demanding faster, easier, more intuitive technology. And so I think that banks have a ways to go to finding meaning in the middle there.

Regardless of whether you take it in house or outsource it, there is a struggle in finding manpower, to be able to deliver quickly, to innovate, to rollout and to execute effectively. But I think more importantly, it's not so much of do we do it in house or do we outsource it, it's more of a function of whether we are developing products and services and technology that are actually going to work and result in what we want it to result in, which is user friendly.

For the small business owner, we still have to understand the demographic of who we're talking to. We're not going to be selling technology to a bunch of tech whiz geniuses who understand algorithms. I think there is a gap there in the development, making sure it's intuitive for an end user.

Banks and fintechs team on SBA lending

All day, every day. I wouldn't even say there's a segregation anymore between banking and fintech. There's so much overlap. Any acronym you can think of, we are all now fully integrated. Let's say we're vertically integrated, whether you're internal or external, everyone is driving towards the same goal.

There's probably some job security in this industry for you and me, because I am a huge advocate of tools, tools, tools. We absolutely must stay ahead of providing tools that allow functionality, but tools will never replace relationship and trust. So I think the tool is almost the prerequisite, it's the relationship that really drives growth.

Tech + humans

I think that interestingly enough, the financial or banking sector was really lagging from a technological advancement perspective. I mean, we were behind every other industry. It's pretty interesting when healthcare is ahead of finance. We have to have the tools, we have to provide access, the biggest tool for me in describing what a financial service or banking tool or technology means is access.

But more than ever, we should certainly rely on algorithms for decisioning, credit risk rating, scoring models. But there is a human somewhere that's determining what the score means, where you sit on a chart of a score, and the degree of scoring and relativity. We need to continue to develop tools, access points. And then behind those access points, it has to be intuitive enough, that there is still that human connection and the human relationship.

How to reach more customers

I've been beating this drum for 25 years now. But the banking industry, financial services industry has really lagged in technology and in marketing. I think it's so interesting, because we assume that the end user understands banker acronyms and bank product terminology. We've almost forced the lingo or the industry onto consumers, which is great from an education standpoint. I think people are a lot more financially savvy today than they were 50 years ago.

But it has always baffled me when a marketing campaign is launched for certain product: How is it possible that someone who owns a pizza parlor knows that they want an SBA seven or a 504 loan product that's based on a 25 year amortization? How would they possibly know unless they're a banker? So the marketing campaigns have a disconnect, we're pushing pushing pushing product, instead of pulling demand. A small business pizza shop owner doesn't know what product he needs. And he certainly doesn't know the acronym. What he knows is he needs to buy an oven. So why don't we have a marketing campaign on buying ovens?

Better personalization

The technology provides the access. John, the pizza parlor owner, when he goes to Google and he typed 'buy an oven' or 'money to buy or loan to buy an oven'. Well, then we're going t need to continue to build out algorithms and using technology and intuitive technology, not just a basic search engine, because again, the basic search engine already assumes they know what they want. It's not looking at the big picture. We need to continue to develop smart technology that provides smart recommendations and smart direction pointing.

What if he bought four different things last year with four different loans, and then he just bought a summer home, and then he's sending three kids to college -- all that should be filtered into this algorithm. And we should do what's best for the customer, not push a product because you know what that does -- that then creates a whole economy of people who have not been able to access thoughtful financial solutions. That's why that word to me is so powerful. I try to include it in everything when I have all my bios in my marketing material, because that's the key to thoughtful technology. It humanizes it.

Relationships take time to build

And that's where the relationship peels the onion, right, so over time, as you form relationships with customers, and you get to know their whole life story, that's how you really can be a valuable bank partner. Because that's how I know: Hey, John, I know I just gave you three other loans last year, I know you have two kids who you're sending off to college over next three years, let's think about this, when the best solution is for you to buy this oven.

This is like a 10 to 20 year investment. Let's think of the big picture here. So that relationship, we need to now build out these codes through technology that can help us do that because truly, I keep a true pulse on this market. We're pushing more product than ever, because that's what marketing and technology in the financial services is trying to do to catch up. Well, that actually is not thoughtful for the long term service of a customer.

We always say it's just money -- it's not personal. Well, guess what? In small business, it's all personal. An entrepreneur and a small business is a family business, most of the time that includes multiple family members. And most of the time, the family is solely reliant on that business for the education, for their food, for their housing. So yeah, it's all personal.

AI in lending

I think there's opportunity with AI. I think we can certainly harness that technology and continue to use AI technology as a catalyst to progress in financial services and banking, to provide access and access integration. And I think AI probably has a quicker ability to pull all the data points across multiple industries, multiple spectrums, than if we humans had to build it over time. I think AI will afford us to have the luxury of more of a cross pollination of data. And more than ever, when when we're looking at the pull factor in serving the small business economy and small business loans, we have to know their entire life picture. So I think AI has more of an ability to pull multiple data points outside even of our banking algorithm data points that we pull. Maybe it'll help us have a bigger, wider range of data.

Models should include lifestyle points. And yeah, health data, demographics data, other family that's involved in the industry and their data points, age, or life changes, getting ready to marriage, children, family stages of life, or are you older and nearing retirement stage -- all that factors into borrowing money. And when you borrow money or you are looking for bank services, it's a true functionality to support your life, because we need money to pay to run our businesses, but also to maintain our lives, and our edge and our children and our livelihood and our futures.

So, again, I think we can certainly develop AI from a technological standpoint to help us pull more data faster, and make it more intuitive versus where we are now, as you enter a few data points and you get a score. It is so archaic, and the score is based on, well, did you move a lot over the last 10 years? How does that help tell you anything about someone's financial burdens? Maybe that was a positive thing, but we treat it as a negative.