The small businesses that survived the financial crisis are stronger than ever – and so is the bank competition for them.
Maria Coyne, the head of consumer and business banking for KeyBank (KEY), says that her bank is seeing increased loan demand from small and midsize businesses. It’s a demand that Key and other banks feel better able to meet, now that many potential business customers are more creditworthy than they were during the financial crisis and its immediate aftermath.
“There’s a lot of conventional [business] lending that’s coming back. Demand is as strong now as it’s ever been, and certainly year-over-year we’re seeing a lot more,” Coyne said in an interview last month. “The quality is definitely coming back.”
During the recession, “all the traditional things that you look at when you’re making a credit decision were impaired. It wasn’t that there was this wholesale change and the credit policy became stricter, it just became a lot harder for people to qualify [for loans] based on the reality of what was going on in their business at that time,” she said.
But “there was an absolute silver lining in the recession, in that the survivors – the businesses that are thriving now – really learned what was important in their business and really figured out where they were making money. I think it positions people well to begin to borrow again.”
Of course, there are many businesses that are reluctant to borrow due to the sluggish pace of the economic recovery and the uncertain political climate. During third-quarter earnings calls, many banks chief executives said that loan growth slowed in the third quarter as concerns about the election, the fiscal cliff, taxes and healthcare costs have kept many potential borrowers on the sidelines.
Key, however, reported a 5.1% increase in business loans from the prior quarter, due to a combination of organic growth and loans it inherited from its recent acquisition of roughly three-dozen branches in upstate New York.
Still, even those businesses that are hesitant to borrow are healthier than they’ve been in years, and the result is that many banks, including JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) are increasingly competing for their business. Bankers from several large and regional banks are gathering in Florida this week to discuss the state of business lending at SourceMedia’s annual Small-Business Banking conference.
Some of those banks have built up their business lending operations and relationships over many years, while others are relative newcomers. What Key will not do is lower its standards to compete with banks Coyne says are lowering theirs.
“There’s always going to be an irrational competitor, that you kind of look at and shrug and say, ‘I’m not quite sure why they’re doing this or how they’re doing it’,” she said. “You lose business to those, but it’s not anything you would ever compete with, either in range or structure.”
Coyne founded KeyBank’s U.S. Small Business Administration lending program and oversaw a 31% increase in the number of bank loans backed by the program last year. The Cleveland bank was named the SBA’s top 7(a) large lender of the year in 2011, and American Banker Magazine named Coyne a “woman to watch” on its annual list of the Most Powerful Women in Banking. She spoke with American Banker on October 16, when she came to New York to accept her award.
Those SBA loans are largely for corporate customers with between $3 billion and $20 billion in annual revenues, but Key has taken steps to better serve its smaller business customers as well. In August, the bank brought its credit card portfolio back in-house after outsourcing it the business to U.S. Bank (USB).
Key wanted to have more control over the entire “relationship” of products that it offered customers, and it also wanted to use the credit card portfolio to revamp its payments business in the wake of regulatory restrictions on debit cards, Coyne said. And “another reason I’m really excited to have the credit cards back is that for a lot of small businesses, all they need is a small line of working capital, which you can accomplish with the right card product,” she added.
Key is also working to upgrade its technology, especially its online and mobile offerings, to appeal more to consumer and business customers.
“Within our branches we’ll be piloting a video-tie presence in the fourth quarter,” she said, so that customers can get specialized video help beyond the staff of each particular branch.
As Key and the entire industry rethinks the utility of the bank branch, Coyne said it’s hard to guess what brick-and-mortar locations will look like in the future. But she says she expects them to stick around in some format.
“Every time you add a new channel, clients don’t stop using the existing one,” she said. “While some people are perfectly happy with the virtual relationship … at some point they like to walk into a branch. I think there will always be a place for the branch."