What’s Next for SME Lending? Part II

AQN examined the Small Business space at the start of the COVID Pandemic, focusing on what comes next for lenders in the space. Since then, the pandemic forced further change in the industry. Another round of PPP loans started recently, major SME lenders were acquired, widespread in-person relationship management stopped, and demand for loans shifted.

Here we share some of AQN’s thoughts on the last year of change, how things may look after, and what’s on our minds as we start 2021.

  • Underwriting: Government-backed loans and grants swarmed the market during the pandemic, with another round of PPP starting in January 2021. Businesses with once consistent revenues experienced large swings in performance. Traditional underwriting indicators will be impacted by pandemic performance. With normalcy on the horizon, how will lenders adapt underwriting policies to originate profitable loans, help businesses retrench and grow, and fill the market void left from government lending?

  • FinTech Lending: SME-focused Fintechs took a big hit. OnDeck was purchased after its market value crashed. American Express purchased Kabbage, with the Kabbage brand name not currently originating traditional loans. How will these brands, and their underlying tech and IP, be deployed by their new owners?

  • FinTech Solutions: Transactional-based SME Fintechs continue to push forward. Brex raised money during the pandemic and Ramp brings new competition to the space. Each Fintech positions its products to solve multiple needs, limiting hassle for SME owners and operators through improved transactional, expense management, and cash management products. Will these transactional solutions gain popularity with businesses as the pandemic subsides? How will large banks counter these offerings? Will they present more holistic solutions to customers rather than extensions of their consumer credit cards?

  • Customer movement and stickiness: Large banks could not serve all their SME customers during the PPP rollout. Small banks and community banks were the beneficiaries, grabbing new customers frustrated with large banks as they sought to access PPP loans. Will the inability to equally serve all customers cause additional migration to community banks and FinTech? Will community banks be able to maintain relationships with lagging digital services? How will PPP loans influence SME decisions for financial service providers?

  • Loan Processing: Successfully processing PPP loans required either  manual brute force processing of applications or adopting digital tools to grab relevant information from standard documents. For those that followed the second path, how will these operational improvements flow to traditional lending products? Improved processing times, higher margins, and/or lower prices for customers? Will the adoption of other PPP related software percolate through the organization and loan origination/management process?

  • Loan Aggregators: Aggregators drive substantial originations for Fintech SME Lenders. Will their pricing power remain when SME lending ticks up again? How will selection dynamics change for smaller lenders with OnDeck and Kabbage entering new phases of operation?

  • Borrower/Lender Interaction: The pandemic forced interactions online for many financial services products. Customers who search online for loan offerings are guided toward local branches for applications and details. Will banks adapt their practices to serve customers in the channel of their choice?

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