For banks, especially smaller community banks, the key to weathering economic turmoil may lie in technology.
The Federal Deposit Insurance Corporation (FDIC) stated in a report titled “Banking Technology and the COVID-19 Pandemic” that “the conventional view of the comparative advantage of small bank business models centers on relationship lending.”
According to the report, this conventional wisdom means that smaller financial institutions (FIs) can acquire “soft” information about potential lenders that would not normally be visible on a loan application.
Indeed, according to the FDIC, at the end of 2019, small banks were responsible for 31% of small business loans, even though they held only about 15% of assets.
“Yet the increase in data availability, advances in statistical classification methods to identify risk, greater computing power and the rise of fintech companies have the potential to erode the advantages that small banks derive from their comparative advantage in collecting soft information,” the FDIC said.
Technology expands customer list
The study focused on how banks’ technology investments could impact their ability to at least maintain and even grow their business in the wake of the pandemic.
Generally speaking, the FDIC found that the more the bank had its “coverage of products installed in non-bank FinTech businesses” (resulting in a “FinTech similarity score”), the more loans it made from the protection program. paychecks (PPP) as measured in the second quarter of 2020 – around 9% higher in volume.
“Furthermore, advanced technology allows banks to provide PPP loans outside of their branch market area, although these more geographically dispersed loans do not crowd out loans in the market. Thus, technology-intensive banks, which appear to operate as a hybrid between physical traditional banks and less physical non-bank FinTech lenders, can effectively compete for financial products that are less reliant on relationship lending,” the study found.
Separately, traditional FIs are indeed embracing new technologies to alleviate various issues (far beyond lending limits) faced by their corporate clients. Many FIs are changing their view of technology and looking for specific technical solutions. These innovations include, but are not limited to, automated account validation and digital safes.
Digging a little deeper, 42% of FIs consider invoice reconciliation to be a significant issue for corporate clients who pay suppliers. Sixty-six percent of FIs think the ability to offer digital payment solutions is very important to their customers.
Read more: How 311 FI is using technology to solve B2B invoicing and cash frictions