the small business banking conference - karen...

The Small Business Banking Conference

Karen G. Mills

Senior Fellow, Harvard Business School

Former Administrator of the U.S. Small Business Administration

November 9th, 2016

Palm Beach Gardens, FL

2

97% 84%

WHAT WILL BE THE IMPACT OF THE PRESIDENTIAL ELECTION?

American Banker

Credit Union Times

Wall Street Journal

Wall Street Journal

WHAT IS CHANGING IN THE SMALL BUSINESS LENDING LANDSCAPE?

Banks

Department

of the

Treasury

Federal Deposit

Insurance

Corporation

Federal Reserve

Office of the

Comptroller

of the

Currency

Consumer

Financial

Protection

Bureau

Credit Unions

REGULATORS SMALL BUSINESS LENDING

TRADITIONAL ONLINE

WHAT IS CHANGING IN THE SMALL BUSINESS LENDING LANDSCAPE?

Banks

Department

of the

Treasury

Federal Deposit

Insurance

Corporation

Federal Reserve

Office of the

Comptroller

of the

Currency

Consumer

Financial

Protection

Bureau

Credit Unions

REGULATORS SMALL BUSINESS LENDING

TRADITIONAL ONLINE

?

?

WILL THE ELECTION CHANGE THE SMALL BUSINESS LENDING LANDSCAPE?

Banks

Department

of the

Treasury

Federal Deposit

Insurance

Corporation

Federal Reserve

Office of the

Comptroller

of the

Currency

Consumer

Financial

Protection

Bureau

Credit Unions

? ?

6

97% 84%

30 Million Small Businesses

High-Growth

~.2M

Suppliers

~1M

Main Street

~4M

Non-Employer

~24M

Employer

5.8M

Other

~.6M

Source: Author’s analysis of data from the U.S. Census Bureau.

WHY WORRY ABOUT ACCESS TO CREDIT FOR SMALL BUSINESSES?

Small businesses account for half of U.S. jobs

SMALL FIRMS HIT HARDER IN THE CRISIS

7

Job losses in small firms accounted for 60% of total job losses

Source: Bureau of Labor Statistics, Business Dynamics Statistics (latest as of 2Q15).

-2000

-1500

-1000

-500

0

500

1000

1500

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Qu

art

erl

y N

et

Jo

b C

ha

ng

e (

in 0

00

s)

Small (<500 Employees) Medium (500-999 Employees) Large (1000+ Employees)

SMALL FIRMS HIT HARDER IN THE CRISIS

8

Job losses in small firms accounted for 60% of total job losses

Source: Bureau of Labor Statistics, Business Dynamics Statistics (latest as of 2Q15).

-2000

-1500

-1000

-500

0

500

1000

1500

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Qu

art

erl

y N

et

Jo

b C

ha

ng

e (

in 0

00

s)

Small (<500 Employees) Medium (500-999 Employees) Large (1000+ Employees)

TURNAROUND IN SBA LENDING

9

97% 84%

Swift action to spur SBA lending, resulted in record year in ’11, ’12, and ‘13

$25.0

$18.0

$22.0

$30.5 $30.3 $30.1

$15

$20

$25

$30

$35

FY08 FY09 FY10 FY11 FY12 FY13

Lo

an

Vo

lum

e (

in b

illio

ns $

)

Source: Small Business Administration. 7(a) and 504 loan volume since Fiscal Year 2008. As of May 2014

SBA Lending Up Two-Thirds From the

Crisis, Bringing Back 1,000 Lenders

CURRENT GAP IN SMALL BUSINESS LENDING: SMALL DOLLAR LOANS

44%

15% 17%

10%13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

<50K $50-100K $100-250K $250-500K >$500K

10

About 75% of small businesses want loans below $250K

Source: Federal Reserve (New York), “Small Business Credit Survey”, Fall 2013

76%

SMALL FIRMS HAVE MORE TROUBLE GETTING LOANS

11

97% 84%

Source: “2015 Small Business Credit Survey,” Federal Reserve, March 2016.

63%

55%

37%

27%

50%

37%

45%

63%

73%

50%

Micro (<$100K)

$100K-$10M

$1M-$10M

Over $10M

All Firms

Financing Shortfall Fully Funded

Loan applicants receiving full funding versus those funded partially or not at all

ONLINE LENDERS OFFER MANY SMALL BUSINESS PRODUCTS

12

97% 84%

Source: Fundera Presentation. September 2016.

STRONG EARLY RESULTS: 20% OF APPLICANTS APPLY TO ONLINE LENDERS

13

97% 84%


9%

20%

42%

52%

Credit Union

Online

Lender

Large Bank

Small Bank

Percent of small businesses applying

BORROWERS LOVE THE EASE OF THE APPLICATION, BUT NOT THE HIGH INTEREST RATES

14

97% 84%

70%

22%

21%

15%

43%

52%

18%

45%

51%

Large Bank Small Bank Online Lender

Application

process difficult

Long wait for

credit decisions

High interest rate

Percent of borrower firms dissatisfied


ONLINE LENDING IS ENTERING PHASE 2 OF MARKET DEVELOPMENT

PHASE 1 PHASE 2 PHASE 3 PHASE 4

• Rapid emergence

and growth of

hundreds of new

online lenders

• Partnerships

between

incumbents and

online lenders

??? • Affordable pricing

and high customer

service

Online Lenders

EnterPartnerships

Selected

Winners Emerge

Small Business

Lending Utopia

PHASE 1: THE WILD WEST – MANY PLAYERS; STRATEGIES ARE MERGING

16

97% 84%

Source: Author’s analysis and Mueller, Jackson. “U.S. Online, Non-Bank Finance Landscape. Milken Institute Center for Financial Markets. 2016.

http://assets1b.milkeninstitute.org/assets/PDF/Online-Non-Bank-Finance-Landscape.pdf

Invoice and

Payables

Financing

LendersMulti-Lender

Marketplaces

Payments/

Ecommerce

Platforms

Balance

Sheet

Lenders

Peer-to-

Peer

Lenders

Data

Providers

Small business alternative lending ecosystem

DON’T COUNT OUT THE BANKS AND TRADITIONAL LENDERS

17

97% 84%

Source: Author’s analysis and “The Brave 100: The Battle of Supremacy in Small Business Lending.” QED Investors and Oliver Wyman. 2015.

97%

Borrower

Acquisition

Borrower

Experience &

Satisfaction

Customer &

Product MixCost of Funds

Underwriting &

Compliance

Costs

INCUMBENTS

DISRUPTORS

COMMUNITY BANKS


18

97% 84%


Borrower

Acquisition

Borrower

Experience &

Satisfaction

Customer &


Underwriting &

Compliance

Costs

✔

✖

INCUMBENTS

DISRUPTORS

COMMUNITY BANKS


19

97% 84%


97%

Borrower

Acquisition

Borrower

Experience &

Satisfaction

Customer &


Underwriting &

Compliance

Costs

✔

✖ ✔

✖INCUMBENTS

DISRUPTORS

COMMUNITY BANKS


20

97% 84%


Borrower

Acquisition

Borrower

Experience &

Satisfaction

Customer &


Underwriting &

Compliance

Costs

✔

✖ ✔ ?

✖ ?INCUMBENTS

DISRUPTORS

COMMUNITY BANKS


21

97% 84%


97%

Borrower

Acquisition

Borrower

Experience &

Satisfaction

Customer &


Underwriting &

Compliance

Costs

✔

✖ ✔ ? ✖

✖ ? ✔INCUMBENTS

DISRUPTORS

COMMUNITY BANKS


22

97% 84%


97%

Borrower

Acquisition

Borrower

Experience &

Satisfaction

Customer &


Underwriting &

Compliance

Costs

✔

✖ ✔ ? ✖ ✔

✖ ✖? ✔INCUMBENTS

DISRUPTORS

COMMUNITY BANKS

AS A BANK, WHAT SHOULD YOU DO?

23

97% 84%

Source: Author’s analysis.

Does the bank want to serve more

small business customers?

NO

YES


24

97% 84%




Does the bank want to diversify

investments into alternative SMB

lending?

STOP

NO

NO

YES


25

97% 84%






lending?

STOP

NO

NO

YESBuy loans

Invest in online

lending companies

YES


26

97% 84%






lending?

STOP

NO

NO

YES

YESBuy loans

Invest in online

lending companies

Refer SMB customers to online

platforms or lenders


27

97% 84%






lending?

STOP

NO

NO

YES

YESBuy loans

Invest in online

lending companies



Offer bank’s products in online

marketplaces


28

97% 84%






lending?

STOP

NO

NO

YES

YESBuy loans

Invest in online

lending companies




marketplaces

Partner with online lenders to deliver

“white label” online customer

experience under the bank’s brand


29

97% 84%






lending?

STOP

NO

NO

YES

YESBuy loans

Invest in online

lending companies




marketplaces

Partner with online lenders to deliver

“white label” online customer

experience under the bank’s brand

Develop new capacity in house or buy

online competitor

BANKS AND INCUMBENT LENDERS: OPTIONS FOR STRATEGIC RESPONSES

30

97% 84%


HighLow

High

Low

Level of

Integration

Investment of

Time & Money

Required


31

97% 84%


Refer Declines

HighLow

High

Low

Buy Loans

Level of

Integration

Investment of

Time & Money

Required

Arms-Length Strategy


32

97% 84%


Refer Declines

Offer Bank Products On

Online Marketplaces

HighLow

High

Low

Utilize Alternative Lender’s

Technology To Power Online

Application

Buy Loans

“White Label” Online

Application, Underwriting,

ServicingLevel of

Integration

Investment of

Time & Money

Required

Partnership Strategy



33

97% 84%


Refer Declines


Online Marketplaces

HighLow

High

Low



Application

Buy Loans



ServicingLevel of

Integration

Investment of

Time & Money

Required

Acquire Online Player

Build Own Product



Build or Buy Strategy


34

97% 84%


Refer Declines


Online Marketplaces

HighLow

High

Low



Application

Buy Loans



Servicing

Internal Innovation Incubator

Long-Tail Strategy

Level of

Integration

Investment of

Time & Money

Required

Direct Equity Investments

Acquire Online Player

Build Own Product



Build or Buy Strategy

CURRENT STATE: SPAGHETTI SOUP – MULTIPLE REGULATORS

35

97% 84%

Source: Author’s analysis and GAO-16-175, “Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness,” March 2016.

Depository

institutions

Federal

ReserveFDIC OCC NCUA FTC CFPB SEC Banking Securities

Non-depository

entities that offer

consumer

financial products

or services

Small business

online lenders

Broker-dealers or

other securities

and derivatives

markets

intermediaries

?

FDIC: Federal Deposit Insurance Corporation

OCC: Office of the Comptroller of the Currency

NCUA: National Credit Union Administration

FTC: Federal Trade Commission

CFPB: Consumer Financial Protection Bureau

SEC: Securities and Exchange Commission

State Regulators

Safety and soundness oversight

Consolidated supervision or systemic risk-related oversight

Consumer financial protection oversight

Securities and derivatives markets oversight

Financial Stability Oversight Council member agency

Currently little oversight of small business online lenders

Federal Regulators

POSSIBLE AREAS FOR REGULATORY ACTION

36

97% 84%

1. Borrower Disclosure: “SMART Box”; Borrower Bill of Rights

2. CFPB: Data Collection – Dodd-Frank Section 1071

3. OCC: Nonbank Charter

4. Broker Oversight: Borrower’s “best interest”

5. Joint Third-Party Guidance

6. Financial Innovation Office(s)

ONE GUIDING PRINCIPLE: “DO IT SMART”

37

97% 84%

Small

business

marketplace

lending

FinTech

GovTechRegTech

Small

business

marketplace

lending

Small business lending is at the intersection of FinTech, GovTech, and RegTech

ONE GUIDING PRINCIPLE: “DO IT SMART”

38

97% 84%

Small

business

marketplace

lending

FinTech

GovTechRegTech

Small

business

marketplace

lending

Small business lending is at the intersection of FinTech, GovTech, and RegTech

1. Issue clear, succinct, joint

guidance

2. Engage industry

3. Use technology

4. Be data driven

HBS WORKING PAPER

Small

business

marketplace

lending

the small business banking conference - karen...

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