I am the GM & Head of Corporate Strategy at Lendio Inc, the largest marketplace for small business financing.
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What would happen if you stopped going head to head with your competition and worked with them instead?
When I first started working in financial services, the battle lines were clear: fintech was on one side and traditional lenders were on the other. Fintech came into the industry with the idea that banking was broken. They thought that with their creativity, nimbleness and tech expertise, they'd be able to take over.
Meanwhile, traditional lenders viewed fintech with a mix of skepticism and concern. They questioned whether these newcomers knew what they were doing. And they waited (perhaps hopefully) for fintechs to either fail or at least learn some hard lessons. But as the industry evolves, the notion that banks and fintechs have to be on opposing sides is changing.
Instead of heated competition, the two are moving toward more collaboration — and it's an exciting shift. A collaborative approach can benefit fintechs, banks and, most importantly, underserved small businesses that need and deserve increased access to capital.
PPP Showed The Way
Over the past few years, there have been many examples of traditional lenders and fintech working together. However, the rapid rollout of the Paycheck Protection Program (PPP) in the early months of the pandemic highlighted how collaboration can accelerate critical initiatives and get money into the hands of those that need it most.
I remember being in a virtual meeting with Lendio leadership in the first weeks of the Covid-19 crisis. The world was shutting down, and our customers' small businesses were in financial shock and in the beginnings of withering away.
Our mission has always been to support and advocate for small businesses. We realized that serving them through this disaster meant relying on our technology and collaborating with banks and the SBA to help distribute PPP funds as fast as possible. While banks had the capital, many couldn't pivot their online infrastructure within weeks to facilitate hundreds of thousands of loans. But we could.
With the focus on helping small businesses survive, we launched a herculean effort that relied on every player's strengths. Our teams worked 18-hour days to launch online PPP applications for small businesses around the country. This time we were fueled by the mission not just to fuel but to save our customers.
When that very first business received funding, we knew the effort was more than worth it. Two years later, we're still hearing stories about how access to PPP loans helped save people's businesses and livelihoods.
The Shift To Collaboration
Lendio ended up partnering with 320 financial institutions — from big banks to CDFIs to regional lenders — to distribute $10 billion in PPP funds. The collaboration facilitated more than 200,000 PPP loans.
The partnerships forged during the pandemic revealed that finance partners can move fast and make a difference by working together. But there's still so much more we can do to improve access to capital for more small business owners. For example, an analysis by New York University showed that Black-owned businesses struggled to obtain PPP loans from traditional banks, but they were 12% more likely to be approved for a PPP loan by a fintech lender.
In fact, through the course of the PPP, fintech firms accounted for over half of the loans made to Black business owners. Looking at Lendio, 24% of our first-draw PPP borrowers were Black business owners, although a February 2021 SBA report indicated that, industry-wide, only 4.8% of first-round borrowers surveyed were Black.
For Lendio, women were more successful at securing first-round PPP funding. The team approved first-round PPP loans for women amounting to 37% of approved loan applications. The same SBA report indicated that of the survey respondents, only 13% of approved loan applications were women.
Working in silos, traditional lenders often miss opportunities to fuel businesses that can thrive. Though I'm one of the first to say I love competition, strategic collaboration is the answer to filling these gaps. Fintechs can provide banks with agility, speed to market and, of course, the technology that enables them to enhance their digital customer experience, improve efficiency and even expand their customer base. Banks bring the institutional knowledge, capital and expertise to the table, along with a broad base of customers and access to the capital that's the lifeblood of entrepreneurship.
But for these partnerships to succeed, you also have to remember the third — and most important — party: the small business customer. You can't remove them from the equation; helping them is the unifying purpose for everyone involved.
As fintech leaders approach opportunities to work with traditional banks, I would advise they come to the table with a desire to genuinely understand the pain points banks face and a high dose of appreciation for the regulatory scrutiny they have to abide by. As the conversations and the deal progresses, my advice would be to establish a clear common ground, set metrics for a successful partnership and institute reasonable protection for your product and services for the medium and long-term.
A Brighter Future
The finance industry is rapidly evolving. The fintechs and banks that recognize the pending changes are cultivating relationships based on each organization's core competencies. Instead of each organization competing for a slice of the old pie, they're working together to make the new pie bigger.
The result is the future of integrated fintech. I believe it's a win-win-win for everyone involved. Fintechs stand to grow their business and build partnerships that add to their value. Financial institutions will increase their digital capabilities to meet the demands of a new generation of banking customers. Most significantly, more small business owners will gain access to the capital that makes their entrepreneurship dreams a reality.
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