Community bankers have reputations for being hidebound in their thinking about loans. The way some banks are approaching online lending to small businesses reinforces that view.
A wave of tech startups are pursuing small-business lending. Aite Group, a Boston consulting firm, counts at least 60 companies, including Lighter Capital in Seattle and IOU Central in Atlanta. Those firms are seizing control of the market for the smallest business loans, ranging from $500 to $50,000, with 12- to 18-month terms. They claim to make decisions on loan applications in a day or less.
Small banks can get in the game. Lendio, a Utah startup, has signed up scores of banks as clients for its online loan-matchmaking service, says Brock Blake, the firm's chief executive. Lendio can pair banks with borrowers anywhere in the country, though most clients want to limit lending to existing markets, he says.
"Most of our customers are not stepping outside their footprint," Blake says.
It doesn't have to be that way, says Robert Giltner, a consultant in Simpsonville, Ky. "Online lenders have things the community banks do not have, like automated loan operations," he said. Likewise, smaller banks have valuable offerings that online lenders lack such as "customers and local reach."
Small banks may worry about the potential for regulators to erect roadblocks, industry observers note. Such concerns may be overstated, particularly if banks adhere to established compliance procedures, says Christine Pratt, a senior analyst at Aite Group.
"You have to be safe and sound," Pratt says. "You have to protect the deposits that are going to be lent out."
Old habits are hard to break. The kind of client online lenders want is usually unsuitable for small banks, says Dan Yates, president of Grandpoint Capital's Grandpoint Bank, a $910 million-asset institution in Los Angeles.
Small banks "would, almost by definition, be moving away from their sweet spot," by chasing those types of clients, Yates says. Rather, they are intent on "building long-term personal relationships with clients where they know and understand the business at a deeper level."
"Super-small businesses" that accept loans from online lenders are willing to pay higher rates, Yates says. Traditional community bank clients are unwilling to do that. "It represents a very different niche than how they have historically built the franchise value over the years," he says.
Loans made by On Deck Capital, Lighter Capital and others have high rates and short terms, neither of which appeals to traditional borrowers, Yates says.
Recent data show that small banks are steadily losing share in small-business lending. At banks with less than $10 billion of assets, loans of $250,000 to $1 million fell 18% at Dec. 31 compared to a mid-2008 peak, to $206 billion, according to the Federal Deposit Insurance Corp. Loans of $100,000 to $250,000 fell 26% from a mid-2007 peak, to $61 billion.
Some banks are giving it a go. Lendio's clients include Eastern Bank in Boston, Holladay Bank & Trust in Salt Lake City, and Extraco Banks in Temple, Texas.
"Community banks are very well capitalized. They've got a lot of deposits and they understand that small-business lending is profitable," Blake says. "They're trying to do more … of these types of loans."
Small banks should consider using the same alternative data models that online lenders use, Pratt says. Kabbage, an Atlanta online lender, makes loan decisions based on data gleaned from social media, or from shipping information.
"Banks can use any kind of data they want," Pratt says. "A long as the community bank is following their principles, they can do whatever they want with the loan application process."
Some small banks will find the technological challenges too steep, Giltner says. He says many banks will likely work with technology providers. "This is in its infancy and market development needs to be done." he says. "But I see partnerships being attractive to traditional bank lenders."