At the end of November, Tim Ferguson and I attended the Small Biz Banking Conference in Nashville, TN. The crowd was a mix of commercial and community banks, solutions providers and consultants, and Fintech startups; topics ranged from partnership strategies, product development and innovation, to regulatory updates. Here are a few themes that stood out to me:
Fintech startups are accelerating the pace of innovation and challenging incumbent depository institutions, yet many have evolved their strategies from going head-to-head to integrating or partnering. For example, OnDeck’s partnership with JPMorgan Chase to create their QuickCapital platform led in part to the recent launch of ODX, a subsidiary created solely to pursue bank partnerships. StreetShares, a startup founded as a military community peer-to-peer lender platform, is evolving to position as a technology provider and seeking bank partnerships. At the same time, intrapreneurship is on the rise within even the oldest banks, but the ‘build versus buy’ dilemma persists and corporate venture efforts like BBVA’s Propel Venture Partners are increasing their activity.
Many Fintech startups lead with mission, including Alpha Business Bank, with a mission to promote small business financial resilience through saving, planning, and education; and Propel portfolio company Azlo, who is “seeking to drive economic opportunity and financial inclusion” with their fee-free digital banking platform for freelancers and entrepreneurs.
Some banks are evolving from purveyors of commodity-like transaction and lending services to holistic providers of solutions to advance small business health. For example, HarborOne U, a center devoted to financial education, life stage programs, and small business assistance, has generated community impact (16k+ served) and generated an additional $100 million in new business for HarborOne Bank. These solutions enhance value proposition and competitive advantage, in addition to generating positive community impact. Assisting in these efforts, the Center for Financial Services Innovation (CFSI) unveiled their most recent small business research report, Solving the Cash Crunch, that outlines how providers can change practices to help businesses with cash flow and improve their financial health. Mainstream institutions are learning from similar long-standing efforts of community development finance institutions (CDFIs).
Despite these signs of progress, banks’ small business lending efforts focused on low-income and underbanked communities remain underdeveloped. Community Reinvestment Act (CRA) lending activity remains largely relegated to compliance and corporate social responsibility (CSR) functions. Some institutions – like KeyBank – are setting higher standards through community benefits agreements (CBA) and evolving their core business banking operations and partnerships to meet them. Many banks still rely on balance sheet loans to CDFIs to effectively outsource their low-income community lending (read Next Street founder Tim Ferguson’s recent thoughts on the CDFI industry here).
Money and mission are increasingly coalescing, accelerated by technology, shifting shareholder values, and the voice of the customer. Banks are increasingly realizing that what’s good for small business is good for business.