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‘Not moving in any direction is worse than the wrong direction’: How banks can kickstart lending to small businesses

  • With the right products and services, small businesses are becoming a promising revenue stream
  • But with little experience with SMBs, a lot of incumbents still struggle to service them

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‘Not moving in any direction is worse than the wrong direction’: How banks can kickstart lending to small businesses

Small businesses may have faced a lot during Covid, but they’ve also grown in numbers. 

While the pandemic left a lot of people jobless, it also left them with more time on their hands, and a fresh opportunity to buckle down and get their entrepreneurial dreams afloat.

In 2020, the number of startups in the US reached 4.4 million — a 24% increase compared to the 3.5 million startups that existed the year before, according to a report by Peterson Institute for International Economics. This is the sharpest increase in startup formation documented to-date. 

In addition, over a year and a half into the pandemic, we’re starting to see SMB optimism climb once more. 58% of small businesses expect revenue to increase in the next year, according to the 2021 Q3 edition of U.S. Chamber of Commerce Small Business Index.

With a cocktail of these types of stats popping up, SMBs are becoming an increasingly promising sector for financial service providers to bank. 

But for incumbents, tapping into this market hasn’t been easy. Historically, SMBs have been a gamble for banks. And today, that leaves them with little experience in providing financial services for these types of companies.

“From a lending perspective, it costs the bank the same amount of money to make a $50 million loan as it does a $50,000 loan. So it’s really hard to justify allocating resources,” said Kathryn Petralia, co-founder of Kabbage, a small business lender, at Tearsheet’s recent Convergence Conference . “And it’s not because they’re bad guys, it’s because it’s hard to do.” 

Serving businesses with 20 employees or less, Kabbage’s standing as a small business lender came in handy during the PPP days. According to Petralia, the company came second — right behind Bank of America and ahead of Chase — in the number of loans it originated during the first round of the program. 

“We were able to grow and rise to the challenge and serve small business customers in ways that banks had a hard time doing simply because of their lack of automation.” 


Petralia calls PPP ‘fintech’s moment in the sun’. In the time period leading up to May 2021, 41 fintechs were collectively the third largest PPP loan originators. Together they lent out almost $22 billion, according to a report by the US Small Business Association. 

The program gave a lot of fintechs a chance to get into SMBs’ line of vision, by appealing directly to their business needs in a way that until then traditional banks hadn’t really succeeded in doing.

“Fintechs [took a different approach than incumbents] by focusing on specific services and needs that businesses have,” said Petralia

But that’s not to say banks have been pushed aside in the SMB mindset. In terms of trust levels with SMBs, they remain ahead of fintechs. Still, that could be changing. As banks are starting to take on more of a behind-the-scenes role, the trust could be shifting to the fintech side.

“Almost all fintechs work with a bank to move money, because at some point, money has to move into a bank account. But what’s happening is fintechs are taking over the customer relationship,” said Petralia. “And I think that’s a really important change, because that is where trust lives, and that is where activity and engagement lives.”

One method for banks to stay in the SMB financing game is through partnership and acquisition agreements with fintechs. Kabbage itself was acquired by Amex in October of last year. Though the acquisition did not include access to the company’s previous lending portfolio, it did allow American Express to make use of Kabbage’s technology and financial data. 

Still in the case of fintech partnerships, Petralia warns that it’s important that the whole company is onboard with the idea, and are motivated to make the partnership successful. 

“If a bank wants to make a fintech partnership work, everyone has to be aligned, everyone has to be bought in, and everyone has to have a financial incentive. We all work for money — you have to have a financial incentive to make it work.”

Then there’s the approach of niching down SMB services, but not too much — adopting a blend of both generalized and specialized services. According to Petralia, the trick is remaining focused on the SMB ecosystem and not getting too distracted by extraneous offers.  

“You’ll end up offering all these products and services– some of which make money, some of which don’t — and you won’t even know what some of them are.”

Finally, there’s bulking up on digital transformation, avoiding legacy tech and legacy thinking, and aligning services for the different types of customers the bank serves.

“At the end of the day, if you’re a bank, you’re really serving two constituents: you’re serving businesses, and you’re serving consumers. And so [you need to structure] your organization to effectively support these two groups [when] making business decisions,” said Petralia.

Whatever banks choose to do, the main takeaway is that they have to choose to do something.

“I think every big bank in this country is hiring consultants like crazy and spending millions of dollars to have them come in and tell them to do things,” said Petralia. “But ultimately, it’s up to the leadership of those institutions to make hard decisions and to move in a direction, because if you’re not moving in a direction, that’s worse than going in the wrong direction.”

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