By Blair Thomas
The breaking wave of mobile apps is changing the B2B landscape. Most businesses have developed their own multi-platform strategies. They have created mobile apps so that the company’s customers can access their products and services whenever and wherever they choose. Coming from the card processing and payments industry, I've seen that wave of development shape how those SMBs expect to do business with partners, vendors and other firms in their ecosystem. They expect the same level of service they provide their own customers: meaning anywhere, anytime service.
That’s causing a problem for the banks. The rise of mobile and the new expectations the technology has created threatens the bank’s SMB loan business. How did they end up in this predicament, and what can they do about it?
The Rise of Mobile
Since our start in 2012, we’ve seen our clients respond to tech developments by radically altering the platforms they sell through. A recent Buzzboard study showed that 49 percent of consumers looking for information about a local SMB do so on their mobile device. The benefits to the clients of those businesses are undeniable: Access to information and the ability to make purchases is available anywhere, and at any time. Mobile puts the power in the hands of the client. They control when and how they make decisions -- and they are served instantly. In response, SMBs are charging into mobile. A ContractIQ mobile app development report 2016 found that 62 percent of SMBs already have an app or are building one.
So, what happens when the owner of one of those businesses -- who has invested in mobile solutions for their customers -- needs funding? They go to their bank. And that’s where the complications begin. Entrepreneurs are consumed by the need to keep on top of the demands of their growing business. They don’t keep banker’s hours, and they can’t afford to wait until a meeting at a bank can be arranged. The needs of their business mean they can’t wait 30 days for loan approval. They want the same "anywhere, anytime" instant service they provide their own customers.
But the big banks aren’t keeping pace with these new needs. In general, since the financial collapse of 2008, banks have been lending less to SMBs. Transaction costs on so-called small loans (under $1 million) are high. Often, banks feel it’s not worth it to serve these clients. In fact, loan approval ratings for SMB clients of big banks ran less than 20 percent in 2014.
And when it comes to mobile solutions, the banks are also lagging. American Banker reports that data from Malauzai Software shows only about 2 percent of banks with between $50 million and $15 billion in assets offer apps specifically for businesses.
The effect on banks is potentially large. The lack of mobile loan solutions that address SMB needs has contributed to an overall reduction in loans issued. A Harvard Business School report states, “In an absolute sense, small business loans on the balance sheets of banks are down about 20 percent since the financial crisis.” If banks fail at the first hurdle — making loan access easy — the customer will be less likely to engage the bank for their other needs. This relationship degradation can lead to a lowering of long-term client value.
What Banks Are Doing About It
The good news for many banks is they have a huge existing SMB client base. If they can solve the mobile conundrum and cost-effectively transact SMB loans in an automated fashion, the upside is great. The question is how to pivot and find ways to serve SMBs in the ways they now expect. How can they best find mobile solutions that offer same day or instant approval, without needing an avalanche of documentation?
When it comes to serving the financing needs of the mobile SMB market, the banks have two choices. They can partner with one of the new alternative lending firms to create a hybrid mobile offering — or they can build their own solution.
The Partnership Model
Rather than building their own in-house mobile offering, some banks, such as JP Morgan Chase, have partnered with a company already working in the space. In the case of JP Morgan, it was OnDeck Capital, a company providing SMB financing through its website. As part of their arrangement, the loans are Chase-branded and they set the underwriting rules, but the offering uses OnDeck’s technology and expertise. Similar partnerships have been struck between CIBC and Thinking Capital, as well as Scotiabank and Kabbage.
The bank benefits from now having an offering that suits its SMB customers' mobile lending needs — without the resource risk associated with pursuing its own in-house build. The SMBs benefit from having easy access to small amount loans through a completely digital process. The partner benefits from sharing the revenues associated with making more loans to the bank’s existing SMB client base.
However, the risk for Chase or any other bank pursuing this strategy is that the tech partner is free to repurpose the solution for similar uses with other banks.
The Last Word
The wave of mobile app development has changed expectations in the SMB market. When it comes to applying for loans, they now seek the same "anytime, anywhere" functionality they provide their own clients. Unfortunately, most big banks don’t have a ready solution. In order to protect their relationships with their SMB clients, they must react. In-house builds and partnership models both have pros and cons. Regardless, banks will have to move fast if they don't want to be pushed out of the SMB loan market.
Blair Thomas is a card processing, payments industry expert entrepreneur and co-founder of FAM.