Each year, the New York Federal Reserve releases a valuable survey that sheds light on the mindset of business owners and their borrowing preferences. Surveys conducted in the past three years point specifically to both the challenges and opportunities community-based lending institutions have in competing with non-chartered online lenders. Here are the key takeaways from the 2019 survey.1. The preference for online origination is growing.
Business owners during the past three years are showing a growing preference toward streamlined loan origination that is initiated online. While banks still maintain a competitive advantage, the trend is clear for the online lenders.
2. The speed of the credit decision remains the key driver for this online preference.
Each year, the New York Fed survey has indicated that the primary benefit business borrowers see with online lenders is the time it takes to render a credit decision. This is followed by the perceived chance of being funded, since online lenders have historically higher approval rates.
3. Interest rates and loan structure remain the key reasons why banks are still the preferred source for loans and lines of credit.
While wait times are the most dominant complaint borrowers have regarding banks, interest rates and payment terms are the main objection to online lenders. Of course, the rates are dependent on credit quality of the facilities as well as the cost of funds incurred by the online lenders. We expect that in the years to come, online lenders will compete more effectively on price, especially for the relationships that offer higher credit quality. While this will depend on their own access to capital, the trend toward the use of more efficient technology is helping drive their operating cost lower.
4. The next few years are important in determining the path of online lending.
The data in these surveys indicates that chartered financial institutions still hold the advantage in attracting business borrowers, but that online lenders continue to gain ground. The best path forward would be to take advantage of your strengths while also eliminating your weaknesses. Many financial institutions have gone down this path in recent years. They have begun to offer streamlined application processes using both web and mobile technology. Through this path of online loan origination, they have effectively eliminated the reason for credit-worthy borrowers to apply with online lenders.
The worst mistake financial executives could make would be to ignore the trends seen in these survey results. Remember that we have seen similar trends in the past related to consumer loans and mortgages. Commercial loans continue to be a significant driver of income for large and small banks. Now is the time to protect your turf by offering some of the same streamlined origination options that your competition is known for. If you can do that while still offering the same level of personalized service you are known for, your chances of success will be even stronger. That is the primary opportunity. Lending technology today can seamlessly flow with your current underwriting practices and workflows. This allows you to effectively offer the best of both worlds.
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