As small businesses increasingly turn to alternative online lenders that offer quicker decisions, faster funding and easier processes, traditional banks can no longer compete on personal touch alone.
That's why Berkshire Hills Bancorp in Pittsfield, Mass., made a strategic investment in technology as part of a revamping of its small-business lending operation three years ago. That investment has helped the $7.8 billion-asset bank achieve exponential growth in the small-business loan portfolio.
"We don't currently view [alternative lenders] as a threat, but you'd be foolish to ignore the future," said Peter Rice, Berkshire's senior vice president of small-business operations. "An investment in this technology is a bulwark to keep us viable and valuable."
According to research from Aite Group, small-business-focused nonbank lenders have doubled their outstanding portfolio balances every year since the mid-2000s. Further, 26% of businesses surveyed by Aite for a report released this month stated they "probably or definitely" would consider using an alternative lender the next time they need credit.
The U.S. Treasury estimates that online alternative lenders originated $5 billion in small-business loans in 2014. While this represents only a small percentage of total small-business loans outstanding, banks cannot take these lenders lightly, said Christine Barry, a senior analyst with Aite.
"Despite the low penetration to date, the threat of alternative lenders should not be ignored, especially given the high percentage of businesses likely to use one in the future," Barry said.
As Berkshire sought to expand its overall business, it knew it had to connect with small businesses to get a foothold in communities it entered, Rice said.
"Small businesses are vital to communities," he said. "When you enter new markets [as a bank] you have to think about, what is your angle? What kind of customers would you appeal to? For us, forming relationships with small businesses keeps on knocking down the door for us. They tend to be active in their communities and quite proud of who they bank with."
Berkshire used technology from Baker Hill, a Carmel, Ind., vendor that it previously had a relationship with, to streamline the entire commercial loan origination process in one, integrated solution that supports prospect, deal structure and credit analysis. The technology quickened the credit approval process while workflow automation improved back-office efficiencies. Further, a continuous, automated monitoring of the credit portfolio helps the bank mitigate risk, identify cross-sell opportunities, and manage the renewal and extension process.
The result is that Berkshire's quarterly loan application volume has grown by 775% since 2013. Customers have a better experience, too, with a quicker decision-making process, Rice said, as the average underwrite time has dropped from 2,500 minutes in 2013 to about 125 minutes today. Rice said Berkshire Bank is now the No. 1 SBA lender in Vermont, western Massachusetts and Connecticut.
Banks can look at alternative lenders in one of two ways, Barry said: strictly as competitors trying to take market share from them, or as partners that can help their lending business grow.
The latter approach could prove the most effective in the long run, said Fiona Grandi, national industry leader for fintech at KPMG.
"These are platforms that are disruptive, for sure, but financial institutions might look at them as additional sales channels, and come in as a partner or investor," she said. "In the mobile era, banks need to rethink how they deliver the lending experience to customers."
One alternative lender taking this cooperative approach is Credibly. Glenn Goldman, the New York company's chief executive, said it works with traditional lenders works and offers its analytics expertise to bank partners.
"Our business model is geared toward partnering with banks," he said. "Our value proposition for bank partners and traditional lenders is willingness to share our data and insights."
But Rice said technology investment isn't the only explanation for Berkshire Hills' success in small-business lending. Its role as a community bank also helps, he said.
"We live in a world where technology is more and more prevalent, but you don't want to lose the magic of the personal relationship," Rice said. "We very much focus on developing the personal relationships."