The small and medium enterprise (SME) segment is a key player in the US economic landscape, making up for 47.8% of the employed population and accounting for 43.5% of private sector economy. This segment is also big on innovation, and has therefore been prioritized by the US government in its financial relief programs – Payroll Protection Program (PPP) and Main Street Lending Program (MSLP) – under the CARES Act.
Banks have a key role in the seamless execution of both these programs. However, they are faced with several challenges around both, the program rules as well as long-term structural issues. Banks, over the next couple of years, will need to reorient their SME offerings for compliance with the new rules and customize them to address the liquidity challenges of small businesses.
With a tight timeline to drive the relief measures, banks had to initially face several challenges around ramping up their systems and processes. The surge in demand for liquidity among SMEs further compounded banks’ challenges.
As are result, to deal with the high volumes of loan requests, most banks have had to create a fresh set of rules for accepting applications.
Bank of America, for instance, has considered only customers who have transaction accounts with the bank. Another example is of Wells Fargo, which is focusing on nonprofits and businesses with fewer than 50 employees. These custom-fit approaches have however not been taken well, as is evident in the backlash from both SMEs and regulators.
Further, since loan disbursement involves processing of several documents, which is mostly a manual exercise and difficult to scale, the sheer volumes have compelled several banks to stop receiving new applications.
The program challenges have been intensified by the existing structural gaps in bank-SME relationships. If not addressed, these will slow down the recovery of small businesses in the post pandemic era.
One such issue is the absence of a standardized credit score for SMEs. SME credit score providers – Dun and Bradstreet, Equifax, Experian, FICO, and so on – use different methods. Moreover, business credit reports can have errors or inadequate information. Hence, the acceptance of a loan application is often subject to the relationship between a bank and the SME.
Also, bank-SME relationships are still mostly limited to lender-borrower engagements. There is untapped opportunity in terms of analyzing transaction details to provide customized offerings for SMEs and deliver value-added services in collaboration with fintechs. This can also help generate new sources of revenue for banks.
Technology giants like Amazon and Facebook have come up with Small Business Relief Fund and Grants Program to support businesses during the pandemic and can scale up further with new services. This may bring disruption to the market and banks need to be prepared. Capability development over the next few years needs to focus on both, internal processes and enhancement of offerings.
Rewiring the bank-SME engagement model
Transformation of internal processes will increase efficiency and scale; manual document processing is currently a big challenge for scaling up SME relationships. Banks need to explore a robust approach of self-service options and automation for PPP and MSLP applications, along with digitalizing KYC-AML and on-boarding processes for SMEs using data sources beyond traditional credit scores – like social media, video engagements and customer data shared with other institutions on secure channels. Additionally, a focused initiative to transform internal data analytics and small business loan origination infrastructure will help banks establish better standards for loan approval and explore opportunities for customized financing. App-based support and API-based ecosystem of technology providers can drive banks to strengthen engagement with SMEs and grow revenue in the process.
Mobile apps can provide options for digital and contactless payments, e-invoice and bill payments, e-signature, on-demand analytics, and virtual assistance (both voice and text) to guide on cash flow positions and suggest corrective actions. For API-based collaboration with fintechs, banks can explore opportunities beyond tax and accounting services, such as CRM, website or app design, and inventory and supply chain management – all relevant capabilities for quick and sustainable business revival.
Interestingly, major banks have already invested in cloud and data analytics technologies, and are exploring ecosystem enablers as the foundation for future transformation. By leveraging these capabilities, banks can identify viable businesses faster for cash infusion and simplify the lives of small business owners by introducing new and customized offerings. This transformation can be further accelerated with automation solutions for application processing for PPP and MSLP loans. There is therefore immense potential that banks can tap into to generate new revenue streams and position themselves as partners to small and medium enterprises this post-COVID revival journey.