Fintechs are filling the merchant credit gap, but it’s not enough
Often, we hear about the very large corporations and tech giants driving the economy forward. There’s no doubt that the many large U.S. corporations have been expanding — including the tech industry, with the S&P 500 technology index jumping by nearly 16.3% each of the last three years.
However, Main Street doesn’t receive enough recognition for its role in economic growth. With more than 28 million private businesses that account for at least half of the U.S. GDP, this segment plays a crucial role in our nation’s economic well-being. At this time last year, Main Street was not aggressively borrowing money from banks, taking risks to expand or hiring new employees.
But that has changed.
According to the latest data, private businesses are now putting money to work and making contributions to the labor market, wage growth and other factors that have subsequently elevated the economy. Investments in and borrowing by private businesses began increasing in October 2017 and continue to gain momentum well into this year. Their performance has significantly contributed to our country’s healthy economic growth.
With all this growth and willingness to borrow, however, private businesses don’t have enough access to credit. The problem? Banks’ underwriting and review processes are not fully prepared to serve this changing market.
This gap in credit stems from the financial crisis of 2008, during which large banks substantially pulled back from lending, especially to small businesses. The average loan private businesses are typically seeking is a relatively small sum compared with other larger corporations. But given the amount of regulations, red tape and cumbersome processes initiated after the crisis, financial institutions found it hard to support credit/loans that small at affordable interest rates.
To help fill the credit gap, other financial service providers have stepped up. Marketplace lenders, commonly referred to as fintechs, developed processes using a combination of technology, data, analytics and conventional credit systems to expedite loan applications and cost-effectively than traditional underwriting processes employed by banks and credit unions.
However, small and midsize banks and fintechs have been unable to entirely fill the credit gap, resulting in fewer loans. In fact, the national average for bank originations for Main Street was down 24% since 2008, while GDP was up 20% over that same period.
This is significant trend that we’ll need to change if we want to keep the economy healthy, vibrant and moving in a positive direction. Main Street needs credit to meet its needs now and in the future, and banks have the social responsibility to provide growth capital to this productive business segment.
Banks can close this credit gap — and increase profitability in the process — by investing in technology to automate and accelerate the credit approval process. This — combined with streamlining the credit approval process and diversifying customer portfolios — will help generate solid, consistent returns on smaller loans. Automating more of the credit process will help banks increase scalability and shorten the loan application process, ensuring profitability without adding more manpower or risk.
Closing the credit gap is a win-win. U.S. private businesses, banks, consumers and the economy overall will benefit.