Recently, a HORNE Banking client, a community bank based in rural Mississippi, shared with us that they are moving into Fintech. This institution does business in their immediate area as well as in some metro locations. Their announcement was noteworthy for a few reasons. First, despite all the talk about this channel over the past few years, we’ve yet to see it in action within community banks. Second, the institution is using Fintech as a technology-based lending platform for its small business clients, rather than as a consumer lending offering.
The bank offered a couple of reasons for the decision. Fundamentally, while they have projected a healthy growth rate for the coming year, achieving it will require looking outside the rural area where the majority of their business exists. Small business growth has slowed as the demographic has aged and their primary service region has evolved into a retirement area. Young families and young businesses are less and less present—meaning that their small business lending pool has shrunk.
Fintech is Right for Community Banks
Simple math reveals that digital delivery channels make significantly more financial sense for community banks than building new branches—regardless of the demographic makeup of their region. A new branch can cost $750,000 to build, almost $1 million per year to maintain, and average 2,500 customers who visit twice a month. On the other hand, a web or mobile app costs around $650,000 to build and $324,000 annually to maintain to serve 23,000 customers—each of whom banks an average 122 times per year.
Digging into the cost of establishing or maintaining the service channel reveals massive operational savings. But for our client, the service scope is even more relevant. This bank is located in an area where an expanded physical presence wouldn’t enable them to serve more customers or add relevance. On the other hand, because it is digital, a Fintech platform removes physical barriers to expanding their client base.
For this rural bank, that expanding base is comprised more of small businesses than individuals. Particularly in their geographic area, Fintech has yet to become widely utilized for small business lending. That lack of uptake is an opportunity. Despite the slow adoption, the platform is mature enough that it is recognized as a way to simplify and speed financial dealings, as well as to make them more secure and less costly.
Faster, Further, and More Valuable
While cautionary tales exist, Fintech providers can work much more quickly and on a broader lending scale than traditional banks. Because they use more hyper-current, digitized information, a small business can know within hours if they will get a loan and even have access to the money within hours of approval. Banks can assess risk and reach new potential borrowers just as quickly. And profitable loan sizes can be as small as $10,000—something that has been almost impossible from traditional banks.
For community and regional banks, beyond the benefits of speed and security, Fintech also offers more scale. Firms like Fundation, the company with which our client is working, provide working capital and growth capital to SMBs by partnering with a group of financial institutions. These banks act as partners within this community, combining lending pools and credit products to grow relationships with small business clients. It’s a way for banks to expand their small balance commercial lending market reach through an efficient and service-driven disciplined credit risk management approach.
Community banks that want to continue to grow and remain relevant have to consider new ways to reach and serve customer audiences they have not yet had access to through a traditional branch approach. Partnering with a Fintech firm can offer measurably valuable loan growth and help the bank to create a better customer experience that satisfies the expectations of their changing demographic base.
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