Small and mid-size businesses (SMBs) are an important segment for U.S. banks, but bank lending to SMBs has been flat in recent years and remains 16 percent below its 2008 peak. Alternative lenders, on the other hand, have seen staggering growth: Kabbage is originating more than $5 million in SMB loans each day, and originations at OnDeck have surpassed the $4 billion mark. Marketplaces, such as Fundera and Biz2credit, and peer-to-peer (P2P) lenders, such as Lending Club, are becoming more active in this space.
U.S. banks, in short, have left a gap in the SMB lending experience that fintech disruptors are using to their advantage. According to the McKinsey’s Small Business Banking Panel, three out of four SMBs use some form of digital engagement (e.g., online, mobile, remote relationship manager) in their banking relationships, and 80 percent indicate that their research process for securing credit begins online. If banks do not move quickly to engage with SMBs digitally, they risk losing as much as 60 percent of their overall profits to fintech attackers over the next decade, and SMBs could be the low-hanging fruit.
To recapture the initiative, banks need to leverage the advantages they already have and develop capabilities to meet the changing needs of the SMB segment.