Nick Chandi is the CEO of ForwardAI, which offers easy, versatile business data access and analysis for banks, lenders, and fintechs.
Fintechs are progressively standardizing same-day funding for consumers in the North American lending industry. In doing so, they’re smoking traditional lenders and banks. Nonetheless, incumbents have an opportunity to leverage similar technologies to make the same impact in the commercial lending space.
A recent fintech lending study found that over 50% of surveyed consumers received funds within 24 hours of application. Fintechs and online lenders are spearheading same-day loan originations by mining traditional and nontraditional data and making use of newer technologies and data analytic techniques to underwrite loans. Marketplace lenders do the same while connecting investors and borrowers on an online platform. According to the Treasury Department, marketplace lending grew to $26 billion in loan originations in 2017.
While same-day funding sounds impressive, many of these fintechs are originating personal loans, which require basic information like proof of identification, income verification, bank statements and proof of address. The application process is a breeze compared to most commercial loan applications, which require more complex paperwork. In addition to basic personal information, traditional commercial lenders will also request basic business information, including permits, tax returns and a host of financial documents relating to the financial health of your business, such as cash flow forecast and profit and loss statements. The whole process is a loop of PDFs and emails exchanged between business owners, accountants and lenders, almost in perpetuity (or so it seems).
As such, traditional financial institutions are often more encumbered in their efforts to offer same-day funding. They are also more reliant on core banking providers or legacy banking systems that have been in place for decades. Many small-to-midsize banks continue to operate on older tech infrastructures while bigger banks have the juice to either retrofit their systems or slowly transition to new tech altogether. None of that is easy, and it’s a problem that young fintechs, which are building their own systems using the latest technology available, don’t have to deal with. Fintechs can hit the consumer market more quickly than legacy banks and lenders can in the commercial market.
The technology adoption lag in the commercial lending space has widened the cash flow gap for small businesses. Small businesses are the backbone of the economy, and between 2012 and 2017, they made up almost 40% of the U.S. GDP, but in a 2021 survey of small businesses, 56% of respondents reported facing cash flow pressure. If you’re in any sort of small-business profession, commercial or retail, you need $50,000 in the bank so you can buy inventory, raw materials, supplies, etc. to run your business and bill your clients. However, too many contractors and SMB owners don’t have idle capital in their accounts, and subsequent efforts to get financing are often painfully tedious and convoluted.
It’s an inefficient approach that we should automate if we want to get smarter about business. SMBs need quick access to capital and lenders need efficient loan origination processes. If I’m an SMB owner, I should be able to access funds in a couple of days, based on my proven cash flow needs. If I’m a lender, I should be able to look at a potential borrower’s data in real time to assess their financing needs and disburse those funds with the click of a button.
This isn’t a pipe dream—we have the technology to do that. Modern lending API providers make the integration easy, such as through white-label, cloud-based portals that smaller banks don’t even need development teams to offer modern lending solutions. Fintechs are especially ahead of the curve with demonstrable examples in Square and Stripe, both of which facilitate real-time data sharing to improve products and services for commercial and retail use. Amazon Marketplace similarly offers its businesses APIs so that they can share real-time data with lenders when applying for business loans. And providers of modern lending APIs do the same with aggregated accounting, financial and business data.
Barriers To Adoption
Commercial lenders have faced barriers in technology adoption due to factors such as complex processes, legacy systems and legal requirements. A study also suggests that technology adoption is affected by perceived usefulness and managerial support, and other factors such as demographics, peers and social network variables, and training. It is certainly true that a lot more goes into consideration for commercial lenders when choosing to adopt new technologies for a better lending experience. However, the reality is that these types of technologies have become readily available, but commercial lenders may not be ready to embrace them.
Clearly, banks and lenders have more competition from fintechs now than ever before. Using a wide range of traditional and nontraditional data, as well as tools like advanced analytics, machine learning and artificial intelligence, banks and lenders can compete to underwrite loans with more speed and agility. If an SMB can get its loans faster and easier and have a better chance of getting them with a certain bank that is utilizing newer tech, then why would it go to a bank that still hasn’t upgraded its system?