Deep Dive: As big banks overlook them, small businesses turn to small banks and fintechs during the crisis

Small business demand for government relief is at record levels. Bigger banks, for the most part, have forsaken SMBs. Smaller banks and fintechs have emerged to service small and medium businesses with streamlined loan processes, technology, and new onboarding tools.

Tearsheet’s Sara Toth Stub wrote a story on the challenges SMBs are facing in this market and what type of financial services firms have emerged to help them.

Sara Toth Stub is my guest today for a deep dive podcast to discuss how small businesses are increasingly turning to smaller banks and fintechs during the pandemic.

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The following excerpts were edited for clarity.

Small businesses, mega banks

Even before the coronavirus pandemic, many small businesses — especially ones with employees — were banking with large banks. That’s according to a survey Cornerstone Advisors’ Ron Shevlin did before the pandemic. He found 75% to 80% of small businesses were banking with a mega bank.

At the same time, the research shows that the majority of small businesses are very likely to seek out a new banking relationship in the future. When the Paycheck Protection Program was announced by the U.S. Government, small businesses needed to turn to a bank to be able to get a PPP loan. Many went to mega banks and in many cases, according to what’s been reported, these SMBs felt they were being ignored by the bigger banks in favor of larger clients.

Many small businesses are turning to alternatives: smaller, more community-oriented banks, banks in certain sectors, or to fintechs. That’s the big picture.

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Getting service

SMBs feel like they’re being overlooked. But it isn’t necessarily true across the board. There can be a lot of nuance to it. Going to a smaller bank does sometimes mean that they have less expertise in certain areas. It’s a complicated picture, but there are a lot of complaints out there from SMBs that they’re not getting satisfying service from bigger banks. There is a least one class action lawsuit filed by small businesses against big banks that they didn’t get the attention they needed for processing their PPP applications.

I talked to some fintechs like PayPal, Kabbage, and Lendio, a marketplace for small business loans. They all said they are getting lots and lots of new customers and inquiries, specifically for PPP applications from SMBs who tried unsuccessfully to apply via their normal bank. A lot of them applied through a bigger bank and just never got an answer.

Dealing with crazy volumes

Some of the fintechs I spoke with are overwhelmed by the number of new customers. They’re having trouble keeping up with the phone volume they’re receiving. It wasn’t an adversarial thing — they understand that the big banks are also overwhelmed.

Treating SMBs right

Small banks and fintechs are scaling up using technology — both existing technology and putting new platforms in place. This helps if you can automate a lot of the processes, like Kabbage and Lendio do. These firms don’t mind whether a business is applying for $2,000 or $200,000 — it’s the same amount of human capital invested because so much of the process is automated.

I also noticed that on some of these firms’ homepages, PPP loan applications were front and center. They are making it seem accessible and easy. Some even included anecdotes from businesses that were approved by them. They make it seem like a friendly and approachable thing.

Moving beyond PPP

Some bigger banks are also emphasizing their focus on PPP. To do that, they are relying more on technology. I spoke with Lightico, which works with big banks and small ones to collect all the signature and documentation electronically.

Fintechs are saying how swamped they are. It’s a good thing for them — they are hearing anecdotally that these new customers are interested in switching more of their business. It’s not just a way to get more customers but an opportunity to show the public that fintechs and small banks can be a good place for small businesses. They’re filling in a gap — even if it’s online only, they are a legitimate, user-friendly option for financial services.

Opportunity to collaborate

Lendio works with a diverse collection of banks — from huge to small banks. They match their customers to borrow from an appropriate bank. That’s a good example of a collaboration between banks and fintechs. Some of the bigger banks are trying to automate more so they can more effectively service small businesses. Even simplifying document collection — which is tedious and involves multiple people — if banks can streamline as a digital process, they can serve more small customers more effectively.

Happy State Bank is a regional bank in Texas. They’ve turned to Lightico to help streamline the process after businesses are approved for a PPP loan. Their digital platform collects the documents and signatures needed for customers to get their money more quickly. People think of regional banks as old fashioned, but here you have an example of a collaboration with a fintech firm.