SMB Lending by the Numbers: What the FDIC Report Means for Your ECM Strategy

Thank you all for joining us today. My name is Kara Talcott. I am the Marketing Communications Coordinator here at Alligent. In today's webinar, we're going to be going over the results of the FDIC's Small Business Lending Survey and breaking down what that data means for institutions like yours. We have two great speakers here with us today. We have Jen Mitchell, the director of product management for AccuAccount, and Alex Gillette, a senior product manager for EIM. If any questions come up during the webinar, please feel free to type them into the chat box. We'll With that, I'm going to hand things over to our speakers. Well, hi everybody. My name is Alex Gillette, I'm a Senior Product Manager for EIM or Enterprise Information Management here at Alligent. I haven't been here a long time, but before here I spent about twenty years in mortgage document management. And let me tell you, coming over to the banking world has been an eye opening experience and I love it here. And so just kind of wanna give you just a little kind of background into who I am and my position here at Alligent. So with that, let's go ahead and get started with this survey here. Let's jump into what the FDIC found when they surveyed small banks about their lending practices. Right off the bat, the big takeaway here is that even with all the FinTech disruption we keep on hearing about relationships still really matter and they matter a lot. And so the FDIC cast a pretty wide net here. So they reached out to about two thousand banks and got responses from about thirteen hundred of them. And that's a really solid response rate, about twenty five percent, about a quarter of all the banks operating in the US. So, you know, we're not really talking about some small sample size here. This real data that we can really take some action on. And so also when we talk about small bank in this context, we're talking about institutions with less than ten billion dollars in assets. So no, I mean, they're not the JP Morgan's of the world, they're not the Wells Fargo's of the world. These are your community banks, your regional players, the ones that still actually know their customers. All right, so let's look at what these banks are actually doing in the small business space because the numbers here tell a pretty interesting story. So first off, we can see here that ninety four percent of these financial institutions are making loans to small businesses. So this isn't some just, you know, niche activity. This is core business where pretty much everybody. So like everybody's in the game here. Half of all small business loans are for amounts up to three million dollars, so we're talking here about, you know, real money, yes, but not massive deals. These are loans to expand a restaurant, buy equipment, maybe purchase some small commercial property, something like that. But here is where it gets like really, really concerning. We've seen a forty six percent decline in the number of small banks between two thousand and eight and twenty twenty three. That's almost half of them gone in just fifteen years. So consolidation, regulatory pressure, the financial crisis, all of those things have really taken its toll. But despite that decline, and this is really interesting, small banks still hold forty two percent of small commercial and industrial loans, plus, commercial real estate. So even though there are a lot fewer of them, they're still punching way above their weight in this market and still have forty two percent is really a lot. All right, so the next sixty four thousand dollars question is, how are these small banks competing? Like what's their edge and the answer isn't super sexy, but it is very powerful. So the top three competitive advantages here are customer service, relationships with customers, and the speed of that service. So if you notice a theme here, it's really all about human interaction and the human element. And so these banks aren't winning on rates, sorry. The big banks can often beat them there. They're not winning on fancy mobile apps or anything like that. What they are winning on is the fact that when you walk in, somebody knows who you are. They know your business, they remember you came in six months ago talking about expanding it to some sort of second location or something like that. And then speed, That speed advantage comes from relationships too. So when an officer already knows your business, knows your track record, they can move at a faster pace than some algorithm at a big bank that's just crunching numbers. So if the bank says no, they can say yes because they understand the context of what you're doing. So the main theme here, technology hasn't replaced relationships in small banking. If anything, it's made those relationships much more valuable. So with that, we're gonna go ahead and turn it over to Jen. All right, so good afternoon, everyone. We're gonna just look at understanding the small business borrowers and what that landscape looks like. So first, that fast, flexible, and local are the top priorities for the small business lending. Customer service and speed of service are viewed indispensable by both small and large banks. Lending flexibility is a competitive advantage for small banks with small business borrowers. Eighty percent of the banks define their small business lending market based on proximity of their branch location. So this is including those small business borrowers preferred to bank locally. They say that at least thirty six percent of the banks report their market within twenty miles of their branch. That's pretty impressive. The next thing that we're gonna look at here is the term loans, our focus. Obviously, term loans seem to be the top priority for small business lending for both small and large banks. The line of credit is, as you can see, is a fast follow in that. Then letters of credit, government guaranteed lending credit cards, and then other. And then we talk about the speed of the service. And the small businesses are more likely than big banks to consider soft information. So when such as a When they come in and you're talking to them, obviously community banks, small banks have the ability to look at loan officer reviews or soundness of the borrower's business plan, industry experience, and market knowledge. The smaller the bank, the more likely it is that the institution's decision makers will meet with the applicant during the approval process. Eighty five percent of banks at five hundred million to a billion, for example, have decision makers meet with applicants during the approval process. So this soft information versus that hard information is so important to those small banks. We're gonna talk about collateral requirements. Small banks require some type of collateral for all loan types, obviously. Managing those collaterals is a challenge to banks. Gathering documents and staying on top of documentation to mitigate risk is very important. You can see here eighty one percent of those loans that are below twenty five thousand need collateral. That's still a pretty high percentage. Ninety seven percent of those medium loans, two hundred and fifty thousand, need some type of collateral. And then obviously, those one million dollars or three million dollars loans, you require ninety nine small banks require ninety nine percent of those to have some type of collateral on them. So now let's look a little bit more into the information requirements from these small businesses. So obviously, the bigger the loan, the more info you're gonna need. Not surprising, the bigger the loan, the bank requires more information from those borrowers. More risk necessitates more info and analysis. Small banks rely on more information than large banks across all loan sizes. So you can see here the average information score for various loan sizes by bank size. One of the biggest challenges in getting this information, obviously, is collecting that information. Competitive and geographic forces are major influences on banks' market size. The operational factors, including the difficulty of gathering information about small business borrowers, also inhibits banks' geographic markets. So this is really where This is a hard market to be in, especially when you're not able to gather that information. The percentage of banks that cited selected reasons for not lending outside of their geographic market because of this. You obviously wanna know your customer. You wanna know where they are. You want them to be close to you. And here is where it gives a little bit more of why they don't lend outside of that world. All right. Next, we're gonna do the loan application process. And before we start on this loan application process, I do wanna take a little bit of a poll, because we see that the loan applications are still being done several different ways, especially for community banks. So my question to you is this, how are you completing loan applications at your financial institutions? So if you wouldn't mind, they're gonna shoot up a, we're gonna put out a poll here, and it's gonna ask you, are you still doing them in branch? Are you doing them on-site visits? Are you going out to see your customers? Are you doing them remote communication via email, file transfer, video conference? Are you doing some type of online website or app? That you're offering for them to fill out so that you can get them start the approval process. We'll give you just a minute to fill out your poll here. This next section is actually very interesting to me. I know that this whole thing was very interesting, but just to learn about the small banks and what keeps small banks competitive and important and relevant. We're going to go ahead and we're going to close that poll now. Okay. So I'm going to look these over as I'm pulling up this next one. And looks like it's probably about the same consensus that I have here on this screen. So in person versus remote, banks still prefer in branch or on-site visits with your customers for that interaction throughout the loan application and approval process. So I commend you for that. You know, the email, file transfer, telephone, video, website, and app seem to support, but not replace that traditional lending practices. So you guys are still have that face to face knowing your customer, knowing who you're lending to, and really a working relationship with them. Hey, Jen, just one second. Looks like the poll despite being closed is still up. So just give me one second. I'm gonna reset that and then your screen should be visible again. Bye. Sorry about that, everyone. There you go. Okay. All right. Okay, Back on. Okay, so we're gonna just talk about this underwriting and approval for small banks right now. Ninety percent of small banks have meetings between decision makers and the loan applicants. That is an impressive number. This is what sets you apart from those large banks when you're doing the small business lending. Seventy seven percent of small banks can approve a typical small business loan within two weeks. So that goes back to that speed and service. It doesn't take you long to get an approval because you are processing that almost within in front of you that whole time, asking the right questions and just building that relationship. So some of the top factors that impact the number of approval levels. Obviously, that seventy seven percent is impacted by the loan size, insufficient debt service coverage ratios outside of the primary lending area, lack of lending experience in the industry, or loan or borrower complexities. So there are some things that do affect that seventy seven percent, but that's still a really, really good number. All right, so now we're gonna talk a little bit about using FinTech and the loan process, and just what that looks like. So using FinTech and the loan process, FinTech is defined by the FDIC as new business processes that use recent technology innovations to alter or improve how financial services are conducted. So this is not replacing anything. FinTech therefore is seen both as a threat and an opportunity, which we understand. Banks seem more likely to adopt FinTech for parts of the lending process related to, as you can see here, compliance, the loan closing, loan performance tracking and servicing. Fintech's use in lending. Why are some banks slow to adopt fintech? Fintech. Based on this chart here, it is perceived risk and cost are two big reasons. Obviously, you are using fintech to do some of these things, but not everything, but the two biggest factors are because of the risk and the cost. So competitive advantages for banks, just looking at this a little bit, the top three competitive advantages for banks go back to our original discussion. Banks prioritize customer service and speed as factors that help them compete. Decision speed and funding speed are two of the three most important specific areas listed here, pointing to the importance of a highly efficient small business lending approval workflow. So biggest things right here, decision speed and funding speed are two of the three top ones. So let's just hit on the key findings here, especially on this tech piece. So tech has not replaced relationships, obviously. The small banks are the industry leaders when it comes to customer service, relationships with customers, and speed of service. You guys are still outstanding when it comes to all of those pieces. And small banks still rely on tried and true lending practices that prioritize high touch relationship building. I have them actually pull this quote out. I thought this was quite interesting. Tech is not built to replace your your current employees. That this what this this quote is saying. It's it's it's built to help banks become more efficient in their daily tasks of compiling information and managing compliance. It takes your manual processes and automates them. This gives your employees more time to take on more loans and build stronger relationships. So really, when you talk about using tech in any type of your loan process, even if it's after the loan has booked, we are not replacing any of your current processes, we're just helping you become more efficient. So How can we help? How can Eligent help you with this? So was actually built for financial institutions. Today, our product AccuAccount is trusted by more than thirty two thousand bankers out in the industry. Active account allows for you to streamline that collection of the documents and automate the exception tracking requirements needed for compliance. So this is a core integrated system that literally helps you become more efficient and compile that information for those examiners and those audits, and it manages the whole life of the loan. So from the images to the exception tracking to the notice generations going out requesting information, to the exam that you can build right out of AccuAccount to share with your examiners, it does that whole process for you. It even allows you to set exceptions based off of statuses or based off of approval statuses. You know, there's a lot of workflow that's built into this to help you manage that whole idea and keep you on track. So you're at the speed of the process. You still have the customer relationship, You've just strengthened that with a product like AccuAccount. Yes. So AccuCount even integrates with the, like I said, it integrates with your card to keep your borrowers and your loans and your collateral information up to date. That collateral is actually managed so that you could even cross it. So we went back to how you have to collateralize quite a bit of your stuff, probably cross collateralize quite a bit of your information. Those cross collaterals can be managed, images, exceptions, the whole bit, with an Accu account. So the next time they come in and they want to lend against one of those already existing collaterals, you have the ability to review it, see what the collateral value is on it, and be able to just collect any additional information you need for it, and start managing that process within Accu. AccuAccount does provide an integration with third party products, so we can also integrate with your LOS and eSign products to manage the rest of that relationship after the loan has booked. Okay, so now we're gonna go ahead and I'm gonna invite Kara to come back, and she's going to read off some questions to us. Thank you so much. Yeah, it does look like we have just a few in the chat. Let's see. First one, does your solution offer reporting that can be sent to users in the bank to resolve missing documents? I will go ahead and take this one. Yes, our product does do that. So we offer a couple different types of reports. You can do what we call our dynamic reports, or you can do our standard reports, but those can be emailed out to individuals in the bank internally that they can then look and request those documents. So this keeps that relationship part where they're not sending out a notice letter to request something, they're actually giving them a call and requesting some information from the borrower so that borrower can bring that stuff in to you. Yeah. Thank you. Let's see. Next one that I see in chat is who at RFI would be utilizing your products? Yeah, hi, this is Alex, Alex Gillette. And usually it's mostly any back office staff, collections to be sure, anybody who has anything to do with loan processing, loan openers, things like that. So anybody like that would be using AccuAccount. Thank you. What course does your system integrate with? So this is Alex again, this is a really easy question is pretty much all of them. So we have It's it's architected so that we can integrate with any core that we need to integrate with. We've integrated with several already, but we are not hampered by a core we haven't seen before or anything like that. So any core you got, bring it and we will, if we don't already have an integration, we will get an integration. Thank you. It looks like we just have one more. How does your solution interface to LOS systems? Okay. I'll actually take that one. And I didn't really give a great explanation of that one in my presentation, so I do apologize. But what we do is typically most LOS, they generate out a file and images to us. We ingest those into our products so we can actually go through the approval process, the application process, and keep our AccuAccount as the imaging with utilizing our ACU approval. So you can gather the documents in ACU, and it'll push through data into ours to tell us where we're at in the application process, or you can work with the application process in the LOS, and then once the loan is booked in the core, we can pick up any data or images and adjust them into AccuAccount, so for go forward work, and after the loan is booked, then it'll manage within our product. Thank you. Looks like that's about all the questions that we received. Thank you everyone for joining us today. If any additional questions do pop up, please feel free to reach out to marketingalligent dot com or visit our website. Please be sure to check out our events page for all future webinars if you enjoyed this one. Thank you to everybody in the audience. We appreciate your time with us this afternoon and hope you have a great day. Thank you. Thanks everybody.