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The coronavirus outbreak has hit the main street-side economy in the gut and it has been unleashing devastation all over the world. Medical authorities are racing to drug trials to slow down and prevent the virus from spreading but success currently eludes the medical community.
So, the question is how did COVID-19 impact the small business lending industry? And, if you are a bank, credit union, or a lender, you probably wonder how can you as an organization best support small businesses in the post-COVID-19 world? On top of that, how do you do it economically profitable, while keeping your staff safe? We address these in this article.
We have seen a significant impact on small businesses and industry over the past few months as a result of the spread of the dreaded Covid-19. The biggest impact has been seen on travel, hospitality, and allied activities. Many states have been removing lockdown restrictions from June but the fear of going out remains and many small businesses in these sectors are facing impending doom.
The small business lending industry will obviously be badly hit with a wave of defaults expected in the coming months. The payroll protection program’s $669 billion has been put to good use but will not be enough to resolve long term fundamental issues facing small businesses.
Even if the government comes up with additional funding, the fundamental question that would remain is – who is out buying in such a pandemic? Financial experts have been recommending individuals and families all this time to hunker down for the long haul and conserve cash to add their emergency reserves. Though a prudent step, it leads to massive revenue losses for small businesses. The evolution of Americans’ buying habits, the further shift from brick-and-mortar stores to online retail, and the focus on essentials will lead to a permanent hit for small businesses.
A poll by Enigma (a NY-based operational data management and intelligence company that specializes in data analytics) has shared some insight into the state of the small business lending industry as of June 2020.
As of June 15, 2020, the SBA also reopened the EIDL application and advanced portal for new applications from qualified businesses. This was done to help those small business owners impacted by the coronavirus crisis who may be wanting to consider an SBA Economic Injury Disaster Loan (EIDL). Such businesses, if not applied previously, could apply now.
The bankers have been more proactive towards their clients as compared to the 2008-09 financial crisis where they simply vacated the space. The American Banking Association (ABA) has come up with an online page that details how its member banks are supporting small businesses and customers in these challenging times.
For their small business clientele, most banks are either:
- Deferring payments
- Reducing interest rates on lines of credits for existing clients
- Increasing credit Lines
- Or, waiving off late fees
As per the details available on ABA’s website:
- 1st Summit Bank has facilitated the Small Business Administration’s Paycheck Protection Program.
- Associated Bank has offered “payment deferrals for up to 90 days on consumer, mortgage and small business loans; temporary payment relief assistance and fee waivers for consumer and small business credit cards”.
- The Bank of America has offered assistance to small business clients facing hardships, including deferred payments and forbearance with certain fees.
- The Citi Bank has extended fee waivers on monthly service fees and remote deposit capture fees, as well as penalty waivers for early Certificate of Deposit withdrawals until May 8, 2020. In addition, it is participating in the Small Business Administration’s Paycheck Protection Program.
- The Fifth Third Bank has offered “a payment waiver program for up to 90 days with no late fees and a range of loan modification options for small business customers.”
- Goldman Sachs, the poster boy of Wall Street has also pitched in with “$300 million to aid small businesses and communities suffering through the coronavirus crisis. The package includes $250 million in emergency small business loans and $25 million in grants to Community Development Financial Institutions”.
But these actions are focused more on the current fight with the Coronavirus. The long-term issue and the trillion-dollar question is determining how will it change the Small Business Lending Industry.
These are the major impact points which will change the small business lending market forever:
- Digital: With social distancing being the new normal, lenders who do not offer an end-to-end digital experience may risk clients dropping mid-funnel. Digital banking was anyway eating up brick-and-mortar banking but the pandemic has marked the end of the branch banking era sooner than expected. Even the older customers, who were considered the last holdout for digital banking, will have to shift to digital banking. This is because they are at the highest risk of infection and it is not prudent for them to expose themselves to the coronavirus. Hence, as a lender, it is a ‘mission-critical’ for the entire lending process – from marketing to onboarding to credit analysis to disbursement to post-disbursement services, everything is run online.
- Cyber Crime: With the entire process going digital and clients (even those with weaker tech background) forced to migrate online, cybercriminals are going to have a field day in trying to hack and defraud your clients. Educating the clients, especially those who are not native to digital banking, will be an important part of the lender’s job. Your reputation as a lender will be judged on your ability to be not in the news for a data hack.
- Automation: Automation and digital are both technology-driven but still two very different things. Digital means being web-based and going online. Automation refers to removing any replicable rule-based process from humans and leveraging Artificial Intelligence (AI) and Machine Learning (ML) for the organization to scale up without any corresponding increase in team size.
Automation has two benefits in the work from home environment-
- It eases up the burden of your team and leaves them to focus on serving the customers or taking strategic decisions.
- It decreases the number of errors (which are now bound to creep up) versus work from home that causes communication issues between remote team members.
4. The Team: Your people are your greatest asset and making sure you take care of them in such tumultuous times is not just corporate social reasonability but basic humanity. Investing in sanitizing your workplace, restricting travel post lockdown, and educating sick customers to remain at home will be essential for the near future. Creating an IT infrastructure so that the majority of your team can work from home without any loss in efficiency will be a big game-changer for the industry.
Conclusion: The Small Business Lending Industry is facing multi-faceted economic challenges. The survival of over 30 million small businesses depends on how the industry will grow out of the crisis into a more receptive and agile version of itself. But one thing is clear, lenders need to urgently invest in AI, ML, and Automation to have a chance of competing in the post-COVID-19 world.
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