The lending space is more crowded—and competitive—than ever before. From digital giants like PayPal and Amazon to online lenders like Biz2Credit and Kabbage, technology companies from all corners of the internet are making inroads into small business lending. Add to the mix companies like QuickBooks Capital, Stripe, and Ant Financial, and the line between banking and technology is increasingly blurred. 

So what do these changes mean for credit unions and small banks—and the small businesses that seek loans from them? 

New Partnerships in the Lending Space

This new class of lenders is spreading their reach with two approaches. Some are pursuing bank charters in their own right, while others are partnering with banks to gain a toehold into small business lending. In essence, these lenders are taking one product that has long been associated exclusively with traditional banking institutions and spinning it into a separate arm of their business.  

Understandably, lenders encroaching on territory once dominated by traditional financial institutions have big and small banks, including Chase, a little on edge. While it might seem counterintuitive, the expansion of fintech into lending can actually be a good thing for small banks and credit institutions. In order to understand why, it’s important to know what non-traditional lenders bring to the table. 

The Perks—and Limitations—of the New Lenders 

Non-traditional lenders are nimble, and for business customers with endless to-do lists, digital-first companies that have speed in their DNA are attractive. These lenders also have rich customer data which makes creating pre-approvals easy. Even more, by forming alliances with existing banks, and gaining access to a depository stream, they can be more competitive with their rates. 

And then there’s one more thing: the investors funding joint ventures between banks and technology companies tend to have deep pockets. That makes these lenders less risk averse than, say, a small banking institution with limited cash reserves. In turn, these lenders can cater to business owners who lack the traditional credit qualifiers. OnDeck, for instance, which recently partnered with HBSC and PNC, will loan to businesses that are typically considered too risky by banks.  

Despite these benefits, traditional small banks still have a critical edge in the lending space. They’re experienced and tend to have deep ties within their communities. Tech companies aren’t going to have the deep knowledge of a community or local loyalties that many small lending institutions do. 

But small banks and credit unions won’t be able to maintain their edge for long. Here’s how you can stay competitive in 2021: 

  • Get tech savvy: In 2020, the pandemic accelerated the shift toward online banking. In 2021, digitized lending is a key part of the banking landscape. Technology that accelerates and streamlines the loan application process—all from the simplicity of a smartphone—and allows lending institutions to scale up by originating more loans in less time is a must. Digitized workflows help save time while eliminating costly manual processes. Combined with secure, automated two-way communication tools that allow applicants to upload all documents directly to their application portal, these two tech tools can help smaller lending institutions stay competitive in a rapidly shifting marketplace. If your lending institution hasn’t already adopted an end-to-end digital application solution, put it at the top of your priority list.

  • Leverage existing relationships: While big banks and digital giants have large existing customer bases, they tend to be more impersonal. Conversely, business owners have walked into your branches and held face-to-face conversations with your staff. They’ve shaken hands with your lending institution’s employees and know their names. If a potential business customer already has an existing savings or checking account, all the better, as the connections built through existing depository operations are the foundation of a lending relationship.

  • Highlight low rates: Small banks and credit unions have historically had the advantage of lower lending rates because of their depository relationships and they’re poised to take advantage of them. In addition, community banks and credit unions can offer discounts when they bundle products — and for business owners who have strong credit, a small lending institution may still offer the most competitive loan terms.

  • Invest in your community. While small banks with limited cash reserves often don’t want to take a chance on small businesses, remember your responsibility to small businesses under the Community Reinvestment Act, which extends beyond PPP. In the long-term, it solidifies your local standing when you meet the credit needs of business in the communities where you operate.   

All banks, large and small, need to prepare for a globalized lending landscape. With the right moves in 2021, the new online lenders don’t have to be an existential threat to community banks and credit unions. New, accessible, easy-to-implement technology solutions can keep you ahead of the curve and in a competitive stance.