A federal stimulus program to combat the recent economic downturn is pushing more community banks to embrace financial technology partnerships.
Some banks already issue Small Business Administration-backed loans, but the $669 billion Paycheck Protection Program, launched in early April, turned many other community banks into SBA lenders almost overnight.
Many banks rushed to onboard new fintech vendors that provide customer due diligence, loan underwriting, and other services needed to swiftly get funds to small businesses harmed by the coronavirus pandemic.
“Some of the initial concern in embracing this technology has gone away,” said Charles Potts, senior vice president and chief innovation officer at the Independent Community Bankers of America.
The PPP, which reinforced bankers’ ties to their communities and small-business borrowers, could translate into a “new paradigm” for bank-fintech partnerships, Potts said.
San Francisco-based tech startup Middesk saw an influx of interested banks looking for alternatives to human-intensive background checks on borrowers, which were creating significant loan processing bottlenecks.
Some banks had turned their compliance and underwriting staff into “professional Googlers” because of the poor quality of information they had on loan applicants and their businesses, Ian Harriman, head of sales and customer strategy at Middesk, told Bloomberg Law.
The startup built a database of business registration data from states and other government resources, updated weekly. In the PPP context, Middesk’s data helped small, young companies or those that didn’t appear in less frequently updated databases get verified and approved for loans, Harriman said.
The emerging technologies and data could play a critical role in expanding small business credit during the coronavirus recovery, particularly for women- and minority-owned companies and sole proprietorships, said Melissa Koide, chief executive officer of FinRegLab, a non-profit research organization.
“The reality is that a lot of underserved customers, consumers and small businesses, don’t necessarily have those basic data that are showing up in the databases that are often used” by banks and other lenders, she said.
New York-based startup Alloy aggregates Middesk and other companies’ data, allowing lenders to perform all their customer due diligence in one spot.
The process helps lenders ensure they aren’t giving loans to potential fraudsters or individuals on anti-terrorism or anti-money laundering watchlists.
“The data is now available” for checks on even the smallest of businesses, said Tommy Nicholas, Alloy’s co-founder and chief executive officer.
Alloy’s platform helped Northeast Bank’s compliance team keep up with lending volume during the pandemic, said Patrick Dignan, the bank’s executive vice president.
The Portland, Maine-headquartered community bank specializes in commercial real estate lending, but developed a small business lending operation in response to the stimulus program led by SBA and the Treasury Department.
“It was really, really heavy lifting. Everything was by hand” during the early stages of PPP lending, Dignan said.
Finding a vendor to speed up the know-your-customer compliance process was a major step for the bank to increase loan volumes and lend beyond its existing customer base after the first round of PPP funding, Dignan said.
Northeast Bank is now looking at other technologies that can boost the bank’s core lending business, Dignan said.
‘Dead Man’ Requirements
Many banks have legacy customer due diligence or other verification checks that were often set up under dated technologies and rules, Harriman said.
Many of those “dead man’s requirements” are obsolete and even paper-based, Harriman said, but many banks keep using them due to habit or risk aversion.
Bank hesitation over the “what ifs” about examiners dinging them for using a new technology or process causes significant friction, Nicholas said.
“I think regulators have an obligation to be more clear, to be more responsive to the changes in the way things are evolving and to have a more open dialog with what they think is reasonable,” Nicholas said.
Community banks would like regulators such as the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to give clearer guidance about onboarding new service providers, said Chris Cole, ICBA’s executive vice president and senior regulatory counsel.
That could include a system where banks share due diligence on fintech and other service providers, such as their financial health or cybersecurity practices, Cole said. Or the regulators themselves could conduct reviews.
“Regulators have been very reluctant to do that,” but it would spare hundreds of banks from starting from scratch when vetting service providers, Cole said.
“This is where the small banks are at a disadvantage compared to larger ones that have the resources to do it,” he said.