Digital Lending and Main Street Credit in 2019: Major Milestones

Commercial Credit, Small Business Credit, Digital Lending, Enterprise Risk Management, Commercial Fraud Solutions, Commercial Scores

As we look back on 2019 and what has affected the flow of credit to private businesses, there are five key areas of impact on the digital lending space. In a coming article, I’ll dive into what to watch for in 2020.

Bank/fintech acquisitions and heavy technology investments

More than 99% of all U.S. businesses are private, and of those, 43% are seeking credit. Given that landscape – and the fact that the small and medium-sized business (SMB) market has been underserved – more and more lenders are considering a digital lending offering for Main Street. Digital lending allows financial organizations to offer the favorable loan terms and conditions, confidence in approval, and fast decisioning that SMBs increasingly demand. 

As we usher in this next era of banking focused on digital lending, banks that have invested in digital systems and technology, such as AI and machine learning, will be able to keep a lid on overhead while expanding offerings to target markets. Digital innovations gave smaller and regional banks, in particular, an opportunity to maintain a high return on equity, low cost of funds and low overhead – helping them become more profitable.

According to IDC, worldwide spending on AI is predicted to increase 44% from 2018 to 2019, with banking being the second largest user at $5.6 billion. In 2019, banks evaluated how to invest in and leverage such technology to streamline the loan approval process, reduce commercial lending fraud, and improve overall customer service with personalized chatbots and other solutions. 

And, banks continued to acquire and partner with fintechs this year an effort to up-level their technology offerings. Regional banks and fintechs – such as Provident Bank/Fundation and PNC Bank/OnDeck, to name just a few – partnered to offer digital lending capabilities to SMBs.

Recession watch continues

As I discussed earlier this year, banking’s Goldilocks era – with its upward growth momentum, low inflation, low interest rates, steadily rising asset prices and historically low financial market volatility – is ending. 

As growth slowed in 2019, we are reminded of the Great Recession, and are increasingly on the lookout for the next one. It’s a question of when—not if—a recession will arrive. While no one can predict when the next recession will arrive, we can predict the likely fate of the banks that have not prepared for it. Now is the time for commercial lenders to be proactive and invest in the resources and technologies that will bolster them against the potential effects of a recession. 

By taking the time to prepare and pack their readiness kits ahead of a recession, lenders can better focus their energies during a recession not merely on staying alive but on growing their relationships and—by extension—their organizations and communities. When Main Street thrives, we all thrive. It’s just a matter of ensuring we have the tools needed to get us through a downturn and beyond.

Before the year is out, commercial lenders should consider running their portfolios through a moderate recession scenario. PayNet’s Recession Ready toolkit includes our Stress Test Simulator, which provides insight into an organization’s strength and resilience to weather unfavorable economic environments – from a progressive slowdown to a worst-case scenario. 

First digital commercial lending app 

In the equipment finance lending space, 2019 was a time of significant advancement with the launch of Innovation Finance’s QuickFi, an app that leverages biometric authentication AI and blockchain to create a seamless mobile experience for corporate borrowers of fixed-rate term loans ranging from $5,000 to $5 million. 

With this app, the equipment financing approval process shrank from three weeks to less than three minutes. And, because there are no salespeople or negotiations, the cost to process equipment financing transactions is a fraction of the cost lenders traditionally have incurred to make such loans. Current 24- to 60-month loan interest rates range from 3% to 8.9%, below industry averages, because of these decreased costs. 

This development marks a turning point for equipment finance lending, which, similar to Main Street lending, has lagged other lending sectors in terms of reasonable terms and a fast, seamless customer experience. Lenders that focus on providing an optimal experience for their customers will be positioned for future growth. 

Combatting commercial lending fraud

Financial institutions indicate that trends in SMB lending fraud are worsening, with 56% of institutions seeing increases in the leading kinds of fraud – those committed via bogus businesses and fraudulent identities. As technology creates increased convenience and accessibility for customers, it also creates opportunity for criminals. Online and traditional banks as well as credit unions are challenged to identify, weed out and track suspicious activity. 

Lenders can combat this growing issue by pooling their data to learn from their collective experience about the many variations of suspicious activity. By banding together, lenders are better prepared to defend themselves against constantly evolving fraudulent tactics.

PayNet/Equifax merger

Earlier this year, PayNet and Equifax combined forces. In making this decision, the key considerations were our customers, our employees and our overall businesses. With every decision PayNet makes, we are committed to lowering the cost of risk to help increase access to credit for private companies. By joining forces with Equifax, we can now provide even greater insights into risk, enabling a better, more accurate assessment, thereby making it easier to deliver capital to Main Street America. 

With the merger, we are one unified commercial team with the domain expertise to help increase the flow of credit in the U.S. and Canada – and with the ability to go global. Our combined data asset covers all of the approximately 30 million private businesses in the U.S. That data includes trade line information for credit assessment purposes. This enables us to demystify risk, allowing for capital access for Main Street America, making it easier for lenders to extend credit to those businesses.  

Moreover, our combined organization creates an almost one-stop shop, versus what used to be a three to five-vendor process for discerning risk. This frees up transaction costs, making it easier for banks to participate and thrive in the Main Street America credit market. By making it easier, faster and less costly to deliver capital, we anticipate many lenders will be able to target a double-digit expansion of credit to small businesses. 

Finally, with more than 900 commercial credit providers contributing to our database of more than $3.8 trillion, PayNet is committed to developing and maintaining a robust fraud suite, which will continue to evolve based on the ever-changing landscape. 

As we wrap 2019, we are grateful for the ability to continue serving the commercial lending community as it transforms and grows. From recession readiness to guidance on the latest tech advancements to how regulations might affect you, we look forward to continuing to serve you in the new year and beyond.