Financial technology (FinTech) is reshaping the banking world, and that is a good thing for both banks themselves and for small business owners in search of capital in 2022.
By nature, FinTechs have been a disruptive force within the banking industry, which has long been resistant to change. But while banks frequently viewed FinTechs as a threat in the early days, many of them today are finding that FinTech firms can actually help them flourish.
If you want to prove this out, look no further than the big banking headlines of the last few years. The need for the banking industry to keep up with technology was never more apparent than during the Paycheck Protection Program (PPP), which the SBA and the Treasury Department established to provide a lifeline to small businesses that were struggling because of the COVID pandemic. So many small businesses applied (over 11 million loans were issued in less than 18 months) that large numbers of banks could not keep up with the volume. FinTechs provided the solution. Many FinTech companies provided the software that banks used to take in applications during this unprecedented program. Far from competing with banks, the FinTech industry was a big part of the success of banking in pulling off one of the greatest public-private partnerships in living memory.
Digitization and AI are enabling the banking industry to be faster and more efficient. In the post-PPP era, banks are seeing that AI and machine learning help them to make better informed small business lending decisions to minimize risk and reduce the incidences of fraud.
Hundreds of banks that were still processing paper applications have joined platforms, such as Biz2X, to improve their performance and respond to the needs of today’s customers. For years, having a large branch system offered a distinct advantage. However, during COVID, the branch footprint became a liability for many banks as customers did not want to venture out and employees had concerns about working in an office. Just as retailers learned that people increasingly prefer to shop online through Amazon and restaurateurs learned that customers like to order food via GrubHub and DoorDash, banks are learning that their customers don’t want to spend their time visiting a branch to take care of their basic banking needs. This is especially true of small business owners, who have less time than ever.
Because FinTechs are changing the whole banking landscape, big bank branch systems are no longer the advantage they traditionally had been. Meanwhile, regional and community banks are using technology to level the playing field. Now everybody will have to readjust their strategies. Technology enables banks to change their own course.
Customer expectations have risen to the point that companies, including banks, must constantly focus on updating and accelerating their processes and providing greater convenience. As Baby Boomers retire and Millennials and Gen Z take over the economy, banks must shift their customer acquisition strategy from expanding their branch system to creating mobile-friendly services. The pattern is taking hold all around the world.
For instance, in India, the government is now allowing new and even existing banks to become digital only. India is realizing that running a bank with multiple branches is becoming increasingly expensive and labor intensive. In the UK, challenger banks have arisen that are fully digital
In the coming year, I predict that the US government, too, will change the way it thinks about financial technology and that banks will benefit from it. The Office of the Comptroller of the Currency (OCC), the organization that regulates banking in the U.S. is already taking steps related to FinTech.
In a statement before the Federal Reserve Bank of Philadelphia’s Fifth Annual Fintech Conference in November, Acting Comptroller Michael J. Hsu discussed modernizing the financial regulatory perimeter. Hsu said: “Modernizing the bank regulatory perimeter cannot be accomplished by simply defining the activities that constitute ‘doing banking,’ but will also likely require determining what is acceptable in a bank-fintech relationship.” It is likely that with regulators thinking more and more about bank-FinTech partnerships, the U.S. will follow what has been happening all around the world.
In 2022, expect banks and non-bank lenders to embrace FinTech. Today, there is so much more clarity about how traditional banks can partner with digital companies. Further, other lending institutions, such as insurance companies, VCs, and other big asset managers, are taking advantage of it. FinTechs are leveling the playing field, and among the biggest winners will be small business borrowers.
We are already seeing changes in Asia and the UK, where FinTechs have acquired and merged with banks. While that is not happening right now in the U.S., it is conceivable that it will.
At a time when four or five big commercial banks in the U.S. control much of the industry, digitization is also what will enable community banks to remain independent. Embracing technology provides an opportunity to improve decision-making by reducing the amount of time it takes to approve a loan — from weeks to just hours – while mitigating risk. Allowing customers to fill out applications online via a mobile phone is more convenient for borrowers and reduces the amount of paperwork, even for complex products like SBA loans. Technology can help community banks process more loans, thereby increasing revenues while also reducing the time and cost of processing paperwork.
Bolstering community banks is in line with the Biden Administration’s goals of expanding access to capital for women and minority-owned businesses. Community banks have a track-record of serving underserved communities. In 2022, we can expect that with FinTech partnerships on the rise, banks and community-based lenders will continue to help a broader and deeper range of small businesses. That’s an outcome I’m sure we can all look forward to in the year ahead.