The 2008 financial crisis fundamentally changed the lending market. Legacy banks became more risk-averse, tightening up lending criteria, resulting in reduced small- and medium-sized Businesses (SMBs) access to capital. This left a gap in the market for nonbank lenders to fill and created a major shift in the competitive financial services landscape. A report titled "The Rise of Finance Companies and FinTech Lenders in Small Business Lending" noted, “during the recovery period [following the financial crisis], nonbank lenders expanded annual lending by 70% from 2010 to 2016, significantly more than banks.”
Nonbank lenders are increasingly taking market share from traditional banks, especially in small business lending, a market that has historically been underserved by legacy banks. The rise of nonbanks is being driven by a high degree of specialization, innovation, personalization and acceleration. These four drivers of nonbank lending are even more significant and timely because of the pandemic. SMBs turned to nonbank lenders for quick relief through the Paycheck Protection Program (PPP), businesses sought out loans to develop their e-commerce presence, and there has been an increase in new business applications from the unemployed-turned-entrepreneur.
Specialization allows nonbanks to tailor their service offerings to align with the financial needs of small businesses. Banks and credit unions typically try to be all things to all people and in the process take a one size fits all approach to financial services. A JD Power U.S. Small Business Banking Satisfaction Study found that banks are falling short of specialization for small businesses with just 28% of customers saying their bank specializes in small business banking.
In contrast, many nonbanks are specialty finance companies that offer a limited number of product lines to a specific customer segment. This translates into a hyper-focus on distinctive product offerings that deliver a better value proposition and exceptional customer lending experiences, which is necessary during this trying time.
Nonbank lenders also tend to be more entrepreneurial and innovative than tradition-bound banks and credit unions that fundamentally take a slower, more cautious risk management approach to lending. This approach runs counter to evolving SMB expectations for a digital approach that delivers faster, more personalized experiences.
Nonbanks embrace innovation to reinvent banking services. For example, they are using technology to streamline the underwriting process with online loan applications, and they are also using data and advanced analytics to gain a better understanding of their customers in order to develop deeper relationships with them. When PPP loans became widely available, many lenders implemented new procedures with digital enhancements to properly vet and approve loan requests as quickly as possible.
Netflix and Amazon set the bar on personalization, shaping consumer expectations for personalized attention and high-touch service. Business buying expectations are also becoming “consumerized,” according to results of a survey by Salesforce. The survey revealed that 72% of business buyers expect vendors to personalize engagement to meet their needs and 69% expect Amazon-like buying experiences.
Traditional banks are lagging in providing these more personalized banking experiences. A Power of Personalization in Banking 2018 report found that 94% of banking firms can't deliver on the "personalization promise.”
SMBs and entrepreneurs are taking their business to nonbanks for a banking experience that offers a high degree of personalization and convenience. In this economy, there is no room for a uniform approach when it comes to lending. Entrepreneurs and SMB owners should align themselves with a nonbank lender willing to help them navigate these uncharted waters and find the best-tailored solution. At times, this solution is a low-collateral loan that most traditional banks will not consider or even a high loan-to-value (LTV) loan requiring a minimal down payment. Nonbanks are also using predictive analytics to gain insights that allow them to deliver hyper-personalization that connects SMB customers to the banking services they need, when they need them.
Living in the Amazon Prime era has created consumer expectations for fast service. Traditional lenders struggle to deliver on this business imperative for speed. Small businesses applying for loans typically need capital and need it fast. Yet many traditional financial institutions continue to use conventional business loan processes that make applying for and getting approved for loans a complicated, lengthy process that is anything but fast. The need for speed in small business lending can be further stymied by banks with loan committees that meet only during specific times of the month or quarter which slows down loan approvals.
The ability to receive a fast-tracked loan in this current climate is critical to many entrepreneurs. Working with a lender in the SBA’s Preferred Lending Program (PLP) can shorten the approval and closing process. Many nonbanks also use digital platforms to streamline and accelerate the loan process. Instead of weeks or months, these institutions can approve loans in a matter of hours and fund loans in a matter of days. Nonbank digital platforms provide SMBs with highly valued real-time accessibility to online services, loan applications, and fee information.
The reshaping of the financial services landscape began in the aftermath of the 2008 recession with the rise of nonbanks and continues today. Nonbank competitors are capturing more and more market share from traditional banks by delivering on customer expectations for specialization, innovation, personalization and acceleration. An EY report noted that market dynamics have changed. “Not only have SMBs’ expectations changed, but they are also adopting new entrants’ services in the FI [financial institution] market to meet these expectations.”