The business community has high hopes for 2021 to be the year when struggling companies and individuals get back on their feet, but a widespread turnaround is anything but a guarantee. And, it certainly won’t come from a return to pre-coronavirus practices.
The Paycheck Protection Program (PPP) is being refunded by Congress to the tune of $284 billion, but keep in mind that this new infusion of government money is less than the $349 billion in the first round, which was gone in just under two weeks (Source: Forbes). And the likelihood of a third round of stimulus seems unlikely.
Going forward, community banks will need to continue to make loans (in order to grow their assets). But how can community and small banks—whose lending model was largely upended for the larger part of a year—move forward into 2021?
Here are three resolutions every community bank should make to prepare for the future:
Invest your own capital
After the second round of government stimulus and PPP expires, small businesses will still have significant capital needs. But it doesn’t have to be that way. Banks have an opportunity to step in with their own capital, re-evaluating their pre-pandemic lending practices that could be stymying their growth. Now is not the time to tighten the purse strings because the cascading effect of small business collapses will damage every community and service provider in the process. Small businesses employ close to half of the U.S. private workforce—a sizable portion of the population that small banks can’t afford to lose as customers should their livelihoods dry up.
Community banks rely on a healthy economy to sustain their customer base. And this means they have to widen their aperture beyond just real estate mortgages or loans to larger companies. Small businesses are less likely to care about interest rates, by the way, and are more interested in speed of funding. This is a great opportunity for community banks. Charging higher rates for shorter-term loans needed to fill immediate small business needs —for example replacing an expensive piece of equipment — can be fruitful for the bottom line.
Focus on minority-owned businesses
The Community Reinvestment Act (CRA) encourages lending organizations to help people in low and moderate-income neighborhoods access funding, but the regulations should be seen as more of a floor than a ceiling—especially now.
Social justice movements have highlighted both the needs and opportunities among minority communities. Twenty-three percent of Black business owners who did not receive PPP loans say their applications were denied without explanation, compared to just 9% of white business owners. And loan data analyzed according to ZIP codes reveals that loans were approved for people living in areas with the greatest proportion of white residents at nearly twice the rate they were for people living in areas with the lowest proportion of white residents.
Partnering with minority business owners not only helps to narrow the gap, but also serves to bolster the very communities that small banks rely on for their success. The Brookings Institution points out that, nationally, people of color represent 40% of the population, but just 20% of businesses with employees—a problem the think tank refers to as “missing businesses” in the communities that need them most. Banks can shore up their communities by empowering their neighbors to build the businesses that move them forward together. Plus, companies today increasingly see their customers calling for greater action to promote equity. It’s in any bank’s best interest—especially a community bank’s—to position themselves as a pillar of the community and helpful neighbor.
Improve your digital capabilities
Returning to pre-pandemic methods and processes isn’t enough. If the pandemic has taught the lending industry anything, it is the need for more automation, more digital services, and a greater eye toward innovation to stay competitive through the next unforeseen disruption we may face as a society.
Over the past year, banks were forced to confront the fact that valuable relationships had to be cultivated beyond face-to-face encounters. Automation—a growing staple across all industries—allows lenders to save time and frustration for both parties, while still offering a personalized experience to their customers. No longer a nice-to-have, this kind of service that leads to faster loan applications, fewer redundancies, and individualized communications are a requirement for successful banks moving forward.
Every other business has been focused on digital in order to survive, so when PPP ends, if a community bank hasn’t done anything, they are going to be left in a very precarious position. Alternative lenders, merchant processors and digital giants (e.g. Kabbage, PayPal) all know how to lend in a digital manner and are aided by advanced algorithms and software to scan financials, process loans, and provide a seamless digital experience for the customer .
Community banks are likely less prepared.
So what to do? The right partnership can quickly level-up a traditional bank’s efficiency in lending. In-house digital innovation at small banks, in particular, simply cannot command the resources and priority that it can in a digital-first organization. But we don’t have to reinvent the wheel. Small banks can boost their capabilities by embracing digital partners who understand all of the nuances of the sector.
While none of us can predict the next normal with any certainty, the right partnerships—personally, community-wide, and digitally—will position small banks as community champions and best-in-class service providers moving into the future.
Jorge Sun is CEO and Co-founder of LendingFront. Jorge started the company in 2015 after spending time at Capital One as Head of Small Business Credit. He previously was part of the founding team of OnDeck, where he served as Chief Credit Officer.