Echos of the 2008 financial crisis rang through 2020 as the small- to medium-sized business (SMB) lending ecosystem once again warned of a pullback of large financial institutions (FIs) from the space.
Main Street SMBs were (and still are) in desperate need of capital for survival, and traditional FIs were no longer the main, or most reliable, source of funding.
But in many ways, the 2020 crisis looked immensely different than that of 2008. What remained consistent, according to Kapitus Chief Operating Officer Ben Johnston, is that both events ignited a reconsideration of the most effective approach to SMB lending.
“I would say the pandemic forced everyone to rethink how they do business, and especially, I think that’s true for small business financial services,” he said.
Speaking with PYMNTS, Johnston described how lenders and borrowers alike are driving change in the financing arena and expressed why he’s so optimistic about the future of SMBs in the months ahead.
Changing Habits
The aftermath of the 2008 financial crisis and the onset of the global pandemic may have created similar consequences for the SMB lending landscape in that both events forced large, traditional FIs to distance themselves from SMB lending.
According to Johnston, the comparison was certainly a fair one, at least in the early days of the pandemic. Yet the FinTechs that had yet to be created in the late-aughts were already in place in 2020. Their existence, combined with the Paycheck Protection Program (PPP), meant new avenues through which capital could be channeled to SMBs were ready to go.
“With PPP stepping in, many banks were then provided a financing vehicle to be able to provide capital to small businesses,” noted Johnston. “I do think that many banks reevaluated their credit box to become much tighter throughout the last year — as all lenders did.”
With many alternative, digital-first SMB lenders also able to participate in the effort of doling out PPP funds, SMBs had more choice about who they worked with to secure funding. Developed on a remote-access and fulfillment model, the PPP initiative largely reinforced what many in the SMB finance space already knew: Digital-first is increasingly the user experience of preference for SMB owners, and as Johnston said, it’s a requirement likely to stay.
“I absolutely believe the digital trend will only accelerate from here,” he noted. “More and more banks will be motivated to improve their online decisioning process and remote access.”
An Open Banking Opportunity
There are lessons to be learned from the past year from all sides of the SMB lending sector. For SMBs, embracing digitization became vital to faster access to funding. For traditional banks, offering an agile, online user experience emerged as an essential strategy to attracting and maintaining SMB customer relationships.
And for FinTechs and alt-lenders like Kapitus, among the biggest lessons learned was the value in data. Through witnessing just how imperative it became for SMBs to secure funding, Johnston said that FinTechs have an opportunity to wield alternative data from new sources to approve SMB borrowers that may have already received the dreaded rejection stamp from a traditional lender using legacy underwriting methods.
“Underwriting and the ability to say ‘yes’ to small businesses when others say ‘no’ … is the reason that non-bank small business lending got started in the first place,” he said, adding that moving forward, Kapitus will be accelerating its own investments in gaining access to alternative data sources.
The company is also pressing ahead with efforts to access not only bank data, but digital bank data, despite a lack of an open banking regulatory framework in the U.S. The pandemic has ignited change and accelerated innovation in many ways, and enticing the U.S. economy to embrace open banking may turn out to be one of them.
“To the extent that data is more readily available, and available in a more timely manner, that will absolutely improve the ability to deliver superior products at lower costs,” Johnston noted. “Greater transparency of data will ultimately lead to better results for customers.”
