Payment tech lenders’ convenience threatens banks

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There’s a new paradigm emerging in the SMB lending market as large tech companies like eBay — which recently partnered with Square — look to tap into a growing frustration with banks’ antiquated lending practices. Banks must find smarter ways to compete, or run the risk of losing a new generation of core customers.

Small and even medium-sized businesses continue to struggle to obtain loans. In fact, the National Small Business Association found that 27 percent of businesses couldn’t get the funding they needed.

Many large, well-established financial institutions have deprioritized small-business lending, viewing these loans as too risky or too expensive to underwrite. But banks relying on outdated systems and processes may be making the wrong call.

Small businesses are the engine of the economy, so underserving them has consequences that are hard to measure and fully understand.
Wherever banks fall short of filling this need, new sources of small-business capital will only continue to crop up, thus creating additional pressure on those banks. Nonbank lenders are popping up in some familiar places.

Amazon began offering short-term business loans to select merchant selling on its site back in 2011. Square and eBay have entered the mix recently, although both are only targeting very specific merchants on their platforms (for now).

These types of offerings could lure new customers aboard who are looking for both payment capabilities and lending options. They are filling a void that banks could easily fill themselves if they were in a better position to make faster, smarter lending decisions.

While lending via e-commerce platforms like Amazon and eBay and payments providers like Square target a very specific audience, banks need to realize that borrowers don’t just shop for a loan exclusively on rate anymore.

For many prospective borrowers — especially busy small-business owners — convenience matters more. For example, Square and Amazon loans are affordable, but the rates they can offer borrowers are not nearly as low as a bank can go with deposit capital.

With merchant data already on hand, the loans can also be offered without requiring an application. The result: speed and convenience win out over price in the end.

The lending business is ripe for change, and companies like Amazon, eBay and Square are eager to push lending into the 21st century. Banks currently enjoy the pole position, but until they revamp and modernize their lending processes to better compete with the speed and convenience of nontraditional lenders, they will continue to lose market share.

Traditional lenders like banks and credit unions are an important piece of the communities they serve, and they can continue to be a trusted partner — if they find a way to make doing business easier. If they don’t accept this new dynamic, they will find it harder and harder to compete in the future.

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