Breaking up is said to be hard to do, unless your partner – in this case, a big bank – turns its back on your business in a time of need. That's exactly the situation that 35-year-old entrepreneur and small business owner Alex Membrillo found himself in during the early stages of the coronavirus lockdown.
Membrillo had been a Wells Fargo customer since 2009 when he launched Cardinal Digital Marketing, an Atlanta-based marketing and advertising firm. Business was fine until the pandemic shuttered Georgia’s economy, forcing Membrillo to consider laying off some or all of his employees unless he could get some kind of emergency funding to get him through the crisis.
Then the funding came, or so Membrillo thought. In April, the federal government unveiled its Payroll Protection Program — a multibillion-dollar effort to help small businesses survive the economic shutdown with low-cost, forgivable loans.
Membrillo appeared to be a perfect loan candidate. Cardinal is what you might call a typical small business. It employs 18 people out of an office in Atlanta and generates $4 million annually. Economists say small businesses, like his, with fewer than 500 employees are the engine of the U.S. economy because they employ nearly half the nation's workforce and in recent years, contribute most of the economy's growth. Saving these companies would be key to preventing the U.S. economy from suffering a second Great Depression.
Under the program, small businesses needed to apply for the money through the financial institution they had a relationship with, and Membrillo thought he had a good one in Wells Fargo. Over the years, he had a $500,000 line of credit and kept $2 million in cash accounts with Wells, plus he paid off a $1 million business loan from the bank six years early, he said.
"We thought they valued our relationship,” Membrillo said.
Maybe not enough. In early April, the first day the Wells Fargo online application portal for the emergency loans was open, Membrillo's wouldn't go through.
“Their site kept crashing – once I got in, it was really only asking if we wanted to be informed when the application was ready,” he said.
“Then we received an email saying we would not be able to apply because we were so far back in line," Membrillo added. "When we did receive an email saying we could now apply, which we did, we never heard back from them until later in the month when we were told we missed the deadline to get the money and they were sorry.”
Throughout the process, Membrillo said he tried calling his longtime Wells banker, who Membrillo said couldn't move the process along (the banker declined to comment for this report). After three weeks of waiting, with no communication as to when they might get a loan or whether his company would get one at all, Membrillo decided to take a different approach.
He heard from other small business owners that he would have better luck getting the loan money from a smaller, so-called community bank. Unlike big, “money-center banks” headquartered in New York City such as JPMorgan Chase, Citigroup and in Wells’ case, San Francisco, community banks are locally owned and operated. You won't see their branch offices on every street corner and they don't conduct glitzy advertising campaigns.
Most of all, they don't focus on serving Fortune 500 companies and other large businesses that are the bread-and-butter clients of the large banks. They have $10 billion or less in assets, operate out of a handful of branch offices or in some cases, just one, and their customer base is uniquely local – the dress shop owner, the local pub or restaurant and other mom-and-pop companies.
And when the PPP loan money became available it was community banks’ chance to shine, according to numerous small business owners interviewed by FOX Business for this report. Membrillo, for his part, applied to four community banks in the Atlanta area in the span of 72 hours, and on April 17, CenterState Bank accepted his application. He received a $238,000 loan just 10 days later.
In the end, Membrillo’s business survived the lockdown with his company and its workforce intact (Georgia was the first state to reopen its economy in late April), but not his relationship with Wells. After he received the money elsewhere, he promptly told the bank he's moving on.
"Wells has lost all my business and we are in the process of moving all of our business to CenterState," Membrillo said.
In a statement to FOX Business, a Wells Fargo spokesman said: “While we can’t comment on the specifics of Mr. Membrillo’s situation, we can appreciate that this was a frustrating process for many business owners. From the start of the program, we were committed to helping as many business owners as we could within the parameters of the program and as quickly as possible.”
As the pandemic lockdowns recede across the country and businesses begin to reopen, the Trump administration has hailed the Payroll Protection Program as an unmitigated success. More than 4.6 million loans have been given out as of Tuesday – 65 percent of those loans (or 10 percent of PPP funds) have been loans of less than $50,000, and the average loan size is $110,000. This, officials contend, means the money went where it was needed – to the small businesses that form the backbone of the economy.
The success of the program, however, is a matter of debate. The program was intended to provide emergency relief to millions of Main Street businesses so they wouldn't have to lay off employees. The low-cost loans, guaranteed by the federal government, are forgivable if the business keeps its workforce.
Even as the economy reopens, businesses like restaurants face a daunting task of surviving as customers continue to practice social distancing and other measures that will depress traffic and limit the number of clients they can serve. These businesses may still have to lay off employees.
Meanwhile, PPP loan money somehow found its way to large companies and profitable financial firms like brokerages because of the plan's arcane rules, meaning there was less available for legitimate small businesses. The initial $350 billion Congress had allotted dried up so fast that lawmakers needed to allocate a second tranche of $310 billion, suggesting the program was significantly underfunded.
Numerous small business owners, like Membrillo, said there's a lot of blame to go around, but they have a particular disdain for the big banks that they thought abandoned them, while extolling the virtues of the community banking system that stepped in and filled the PPP void. And in the aftermath of the PPP loan rush, community banks are seeing a surge of new business activity as small businesses move their accounts and relationships to the smaller banking institutions, FOX Business has learned.
Numbers on how many small businesses have switched to community banks in recent weeks could not be obtained. At least for now, the nation's seven largest banks control 70 percent of all bank assets. While community banks have largely survived by forging personal relationships with their customers, they may not have the scale of services to compete with the likes of Wells Fargo as the banking needs of customers grow.
But officials at trade and lobbying groups representing the community banking system and community bankers themselves say the anecdotal evidence shows that the movement away from big lenders to community institutions is real, and is reshaping the banking business.
“We always talk about relationship banking but it’s hard to put that in practice until something like this comes up,” said Robin Wantland, president of Liberty Capital Bank, a community bank. “Our opportunity to shine comes up when people are at another bank that can’t help them. This shined a spotlight on what we’re able to do.”
Dallas-based Liberty appears to have shone brightly. The bank has around $350 million in assets and processed 250 PPP loans. Of those loans, 47 percent were made to new customers. Almost all of those new customers are now in the process of moving their business accounts to Liberty. The bank’s executives tell FOX Business they would normally be lucky to get this many new customers in two to three years.
“It’s been a very nice PR win for community banks. The discussion around water coolers is that community banks were responsive. People are telling us they’d have to shut down their business if we hadn’t gotten them a loan,” Wantland added.
Officials who represent the big banks are keenly aware that the PPP loan issue has been a PR disaster that could impact their banks' bottom line. In interviews with FOX Business, they privately blame Congress and the White House for a hastily cobbled together loan program with few specific rules other than a general edict to lend money as quickly as possible. With little guidance from lawmakers, the big banks had to adhere strictly to internal procedures that automatically put small businesses at a disadvantage in getting the loans.
So-called "Know Your Customer" rules designed to prevent money laundering meant loan applicants needed to be vetted fully before the money could be granted. While many small businesses may have accounts with a local office of a large bank, they haven't had deep lending ties to these banks, meaning the branch was forced to complete a thorough and time-consuming background check before a loan can be processed. The first tranche of loans ended before many of these applications could be properly vetted.
The big banks faced other obstacles in handling small business applications, officials said. Because of the huge demand for PPP loans, they were forced to prioritize customers or face possible legal action later. That meant the local barbershop, that by its nature didn't regularly tap lines of credit from a big bank, was pushed behind the other qualifying businesses like hedge funds, brokerages and small law firms that borrowed regularly even if they weren't the type of outfits the program was designed to aid.
The big banks also say smaller banks may have skirted the Know Your Customer rules because they are more lightly regulated than major financial institutions that have regulators monitoring their every move, setting up the potential for fraudulent loans being granted to shell companies that lied on the applications.
“Large banks took immediate steps to build technology solutions necessary to meet heavy demand for loans that smaller banks were not facing, and there were delays and understandable bank and borrower frustration," said Greg Baer, president of the Bank Policy Institute, a lobbying group representing the nation's largest financial institutions.
“At the same time, nonbanks were apparently making loans without performing all the regulatory checks required of large banks," Baer added. "In the second round after SBA made necessary technology upgrades, large banks were processing tens of thousands of loans a day, with three-quarters of them going to small businesses with fewer than 10 employees.”
The Justice Department has launched several investigations and made numerous arrests involving PPP loan fraud, though it's unclear if these activities were the result of community banks failing to enforce Know Your Customer rules. Liberty’s Wantland told FOX Business that small banks are subject to the same regulations as big banks.
“All of our new PPP customers were referred to us either by existing customers or by other trusted advisors that we have worked with in the past," he said. "All of these new clients were already known by these referral sources and each of the referral sources acted as a reference to us on the new clients. Additionally, we did all of the necessary ‘Know Your Customer’ background checks."
One thing is certain: Community banks have done yeoman’s work in doling out these loans: Banks with under $10 billion in assets have given out 44 percent, or 2.4 million business loans. Banks with more than $50 billion in assets have disbursed 37 percent, or 1.6 million loans, according to information released by SBA.
While some corporate banks may see issuing $100,000 loans as small potatoes, the consumer and community banking element of revenue for all banks is becoming increasingly important as more traditional revenue sources like investment banking fees are being compressed by technology and competition.
In 2019, the nation's largest bank, JPMorgan, grossed $115.6 billion in revenue. Of that, 47 percent of that revenue came from its Consumer & Community Banking arm. Longtime banking stock analyst Dick Bove of Rafferty Capital Markets takes a dim view of the future of banking, and he said losing small business owners as clients won't help.
“The business model is broken; the price of every product a bank sells is going down," Bove said. “Banks should be bringing in more retail clients as it gets harder to make money from corporate clients.”