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The Small Business Banking Conference
Karen G. Mills
Senior Fellow, Harvard Business School
Former Administrator of the U.S. Small Business Administration
November 9th, 2016
Palm Beach Gardens, FL
2
97% 84%
WHAT WILL BE THE IMPACT OF THE PRESIDENTIAL ELECTION?
American Banker
Credit Union Times
Wall Street Journal
Wall Street Journal
WHAT IS CHANGING IN THE SMALL BUSINESS LENDING LANDSCAPE?
Banks
Department
of the
Treasury
Federal Deposit
Insurance
Corporation
Federal Reserve
Office of the
Comptroller
of the
Currency
Consumer
Financial
Protection
Bureau
Credit Unions
REGULATORS SMALL BUSINESS LENDING
TRADITIONAL ONLINE
WHAT IS CHANGING IN THE SMALL BUSINESS LENDING LANDSCAPE?
Banks
Department
of the
Treasury
Federal Deposit
Insurance
Corporation
Federal Reserve
Office of the
Comptroller
of the
Currency
Consumer
Financial
Protection
Bureau
Credit Unions
REGULATORS SMALL BUSINESS LENDING
TRADITIONAL ONLINE
?
?
WILL THE ELECTION CHANGE THE SMALL BUSINESS LENDING LANDSCAPE?
Banks
Department
of the
Treasury
Federal Deposit
Insurance
Corporation
Federal Reserve
Office of the
Comptroller
of the
Currency
Consumer
Financial
Protection
Bureau
Credit Unions
? ?
6
97% 84%
30 Million Small Businesses
High-Growth
~.2M
Suppliers
~1M
Main Street
~4M
Non-Employer
~24M
Employer
5.8M
Other
~.6M
Source: Author’s analysis of data from the U.S. Census Bureau.
WHY WORRY ABOUT ACCESS TO CREDIT FOR SMALL BUSINESSES?
Small businesses account for half of U.S. jobs
SMALL FIRMS HIT HARDER IN THE CRISIS
7
Job losses in small firms accounted for 60% of total job losses
Source: Bureau of Labor Statistics, Business Dynamics Statistics (latest as of 2Q15).
-2000
-1500
-1000
-500
0
500
1000
1500
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Qu
art
erl
y N
et
Jo
b C
ha
ng
e (
in 0
00
s)
Small (<500 Employees) Medium (500-999 Employees) Large (1000+ Employees)
SMALL FIRMS HIT HARDER IN THE CRISIS
8
Job losses in small firms accounted for 60% of total job losses
Source: Bureau of Labor Statistics, Business Dynamics Statistics (latest as of 2Q15).
-2000
-1500
-1000
-500
0
500
1000
1500
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Qu
art
erl
y N
et
Jo
b C
ha
ng
e (
in 0
00
s)
Small (<500 Employees) Medium (500-999 Employees) Large (1000+ Employees)
TURNAROUND IN SBA LENDING
9
97% 84%
Swift action to spur SBA lending, resulted in record year in ’11, ’12, and ‘13
$25.0
$18.0
$22.0
$30.5 $30.3 $30.1
$15
$20
$25
$30
$35
FY08 FY09 FY10 FY11 FY12 FY13
Lo
an
Vo
lum
e (
in b
illio
ns $
)
Source: Small Business Administration. 7(a) and 504 loan volume since Fiscal Year 2008. As of May 2014
SBA Lending Up Two-Thirds From the
Crisis, Bringing Back 1,000 Lenders
CURRENT GAP IN SMALL BUSINESS LENDING: SMALL DOLLAR LOANS
44%
15% 17%
10%13%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
<50K $50-100K $100-250K $250-500K >$500K
10
About 75% of small businesses want loans below $250K
Source: Federal Reserve (New York), “Small Business Credit Survey”, Fall 2013
76%
SMALL FIRMS HAVE MORE TROUBLE GETTING LOANS
11
97% 84%
Source: “2015 Small Business Credit Survey,” Federal Reserve, March 2016.
63%
55%
37%
27%
50%
37%
45%
63%
73%
50%
Micro (<$100K)
$100K-$10M
$1M-$10M
Over $10M
All Firms
Financing Shortfall Fully Funded
Loan applicants receiving full funding versus those funded partially or not at all
ONLINE LENDERS OFFER MANY SMALL BUSINESS PRODUCTS
12
97% 84%
Source: Fundera Presentation. September 2016.
STRONG EARLY RESULTS: 20% OF APPLICANTS APPLY TO ONLINE LENDERS
13
97% 84%
Source: “2015 Small Business Credit Survey,” Federal Reserve, March 2016.
9%
20%
42%
52%
Credit Union
Online
Lender
Large Bank
Small Bank
Percent of small businesses applying
BORROWERS LOVE THE EASE OF THE APPLICATION, BUT NOT THE HIGH INTEREST RATES
14
97% 84%
70%
22%
21%
15%
43%
52%
18%
45%
51%
Large Bank Small Bank Online Lender
Application
process difficult
Long wait for
credit decisions
High interest rate
Percent of borrower firms dissatisfied
Source: “2015 Small Business Credit Survey,” Federal Reserve, March 2016.
ONLINE LENDING IS ENTERING PHASE 2 OF MARKET DEVELOPMENT
PHASE 1 PHASE 2 PHASE 3 PHASE 4
• Rapid emergence
and growth of
hundreds of new
online lenders
• Partnerships
between
incumbents and
online lenders
??? • Affordable pricing
and high customer
service
Online Lenders
EnterPartnerships
Selected
Winners Emerge
Small Business
Lending Utopia
PHASE 1: THE WILD WEST – MANY PLAYERS; STRATEGIES ARE MERGING
16
97% 84%
Source: Author’s analysis and Mueller, Jackson. “U.S. Online, Non-Bank Finance Landscape. Milken Institute Center for Financial Markets. 2016.
http://assets1b.milkeninstitute.org/assets/PDF/Online-Non-Bank-Finance-Landscape.pdf
Invoice and
Payables
Financing
LendersMulti-Lender
Marketplaces
Payments/
Ecommerce
Platforms
Balance
Sheet
Lenders
Peer-to-
Peer
Lenders
Data
Providers
Small business alternative lending ecosystem
DON’T COUNT OUT THE BANKS AND TRADITIONAL LENDERS
17
97% 84%
Source: Author’s analysis and “The Brave 100: The Battle of Supremacy in Small Business Lending.” QED Investors and Oliver Wyman. 2015.
97%
Borrower
Acquisition
Borrower
Experience &
Satisfaction
Customer &
Product MixCost of Funds
Underwriting &
Compliance
Costs
INCUMBENTS
DISRUPTORS
COMMUNITY BANKS
DON’T COUNT OUT THE BANKS AND TRADITIONAL LENDERS
18
97% 84%
Source: Author’s analysis and “The Brave 100: The Battle of Supremacy in Small Business Lending.” QED Investors and Oliver Wyman. 2015.
Borrower
Acquisition
Borrower
Experience &
Satisfaction
Customer &
Product MixCost of Funds
Underwriting &
Compliance
Costs
✔
✖
INCUMBENTS
DISRUPTORS
COMMUNITY BANKS
DON’T COUNT OUT THE BANKS AND TRADITIONAL LENDERS
19
97% 84%
Source: Author’s analysis and “The Brave 100: The Battle of Supremacy in Small Business Lending.” QED Investors and Oliver Wyman. 2015.
97%
Borrower
Acquisition
Borrower
Experience &
Satisfaction
Customer &
Product MixCost of Funds
Underwriting &
Compliance
Costs
✔
✖ ✔
✖INCUMBENTS
DISRUPTORS
COMMUNITY BANKS
DON’T COUNT OUT THE BANKS AND TRADITIONAL LENDERS
20
97% 84%
Source: Author’s analysis and “The Brave 100: The Battle of Supremacy in Small Business Lending.” QED Investors and Oliver Wyman. 2015.
Borrower
Acquisition
Borrower
Experience &
Satisfaction
Customer &
Product MixCost of Funds
Underwriting &
Compliance
Costs
✔
✖ ✔ ?
✖ ?INCUMBENTS
DISRUPTORS
COMMUNITY BANKS
DON’T COUNT OUT THE BANKS AND TRADITIONAL LENDERS
21
97% 84%
Source: Author’s analysis and “The Brave 100: The Battle of Supremacy in Small Business Lending.” QED Investors and Oliver Wyman. 2015.
97%
Borrower
Acquisition
Borrower
Experience &
Satisfaction
Customer &
Product MixCost of Funds
Underwriting &
Compliance
Costs
✔
✖ ✔ ? ✖
✖ ? ✔INCUMBENTS
DISRUPTORS
COMMUNITY BANKS
DON’T COUNT OUT THE BANKS AND TRADITIONAL LENDERS
22
97% 84%
Source: Author’s analysis and “The Brave 100: The Battle of Supremacy in Small Business Lending.” QED Investors and Oliver Wyman. 2015.
97%
Borrower
Acquisition
Borrower
Experience &
Satisfaction
Customer &
Product MixCost of Funds
Underwriting &
Compliance
Costs
✔
✖ ✔ ? ✖ ✔
✖ ✖? ✔INCUMBENTS
DISRUPTORS
COMMUNITY BANKS
AS A BANK, WHAT SHOULD YOU DO?
23
97% 84%
Source: Author’s analysis.
Does the bank want to serve more
small business customers?
NO
YES
AS A BANK, WHAT SHOULD YOU DO?
24
97% 84%
Source: Author’s analysis.
Does the bank want to serve more
small business customers?
Does the bank want to diversify
investments into alternative SMB
lending?
STOP
NO
NO
YES
AS A BANK, WHAT SHOULD YOU DO?
25
97% 84%
Source: Author’s analysis.
Does the bank want to serve more
small business customers?
Does the bank want to diversify
investments into alternative SMB
lending?
STOP
NO
NO
YESBuy loans
Invest in online
lending companies
YES
AS A BANK, WHAT SHOULD YOU DO?
26
97% 84%
Source: Author’s analysis.
Does the bank want to serve more
small business customers?
Does the bank want to diversify
investments into alternative SMB
lending?
STOP
NO
NO
YES
YESBuy loans
Invest in online
lending companies
Refer SMB customers to online
platforms or lenders
AS A BANK, WHAT SHOULD YOU DO?
27
97% 84%
Source: Author’s analysis.
Does the bank want to serve more
small business customers?
Does the bank want to diversify
investments into alternative SMB
lending?
STOP
NO
NO
YES
YESBuy loans
Invest in online
lending companies
Refer SMB customers to online
platforms or lenders
Offer bank’s products in online
marketplaces
AS A BANK, WHAT SHOULD YOU DO?
28
97% 84%
Source: Author’s analysis.
Does the bank want to serve more
small business customers?
Does the bank want to diversify
investments into alternative SMB
lending?
STOP
NO
NO
YES
YESBuy loans
Invest in online
lending companies
Refer SMB customers to online
platforms or lenders
Offer bank’s products in online
marketplaces
Partner with online lenders to deliver
“white label” online customer
experience under the bank’s brand
AS A BANK, WHAT SHOULD YOU DO?
29
97% 84%
Source: Author’s analysis.
Does the bank want to serve more
small business customers?
Does the bank want to diversify
investments into alternative SMB
lending?
STOP
NO
NO
YES
YESBuy loans
Invest in online
lending companies
Refer SMB customers to online
platforms or lenders
Offer bank’s products in online
marketplaces
Partner with online lenders to deliver
“white label” online customer
experience under the bank’s brand
Develop new capacity in house or buy
online competitor
BANKS AND INCUMBENT LENDERS: OPTIONS FOR STRATEGIC RESPONSES
30
97% 84%
Source: Author’s analysis.
HighLow
High
Low
Level of
Integration
Investment of
Time & Money
Required
BANKS AND INCUMBENT LENDERS: OPTIONS FOR STRATEGIC RESPONSES
31
97% 84%
Source: Author’s analysis.
Refer Declines
HighLow
High
Low
Buy Loans
Level of
Integration
Investment of
Time & Money
Required
Arms-Length Strategy
BANKS AND INCUMBENT LENDERS: OPTIONS FOR STRATEGIC RESPONSES
32
97% 84%
Source: Author’s analysis.
Refer Declines
Offer Bank Products On
Online Marketplaces
HighLow
High
Low
Utilize Alternative Lender’s
Technology To Power Online
Application
Buy Loans
“White Label” Online
Application, Underwriting,
ServicingLevel of
Integration
Investment of
Time & Money
Required
Partnership Strategy
Arms-Length Strategy
BANKS AND INCUMBENT LENDERS: OPTIONS FOR STRATEGIC RESPONSES
33
97% 84%
Source: Author’s analysis.
Refer Declines
Offer Bank Products On
Online Marketplaces
HighLow
High
Low
Utilize Alternative Lender’s
Technology To Power Online
Application
Buy Loans
“White Label” Online
Application, Underwriting,
ServicingLevel of
Integration
Investment of
Time & Money
Required
Acquire Online Player
Build Own Product
Partnership Strategy
Arms-Length Strategy
Build or Buy Strategy
BANKS AND INCUMBENT LENDERS: OPTIONS FOR STRATEGIC RESPONSES
34
97% 84%
Source: Author’s analysis.
Refer Declines
Offer Bank Products On
Online Marketplaces
HighLow
High
Low
Utilize Alternative Lender’s
Technology To Power Online
Application
Buy Loans
“White Label” Online
Application, Underwriting,
Servicing
Internal Innovation Incubator
Long-Tail Strategy
Level of
Integration
Investment of
Time & Money
Required
Direct Equity Investments
Acquire Online Player
Build Own Product
Partnership Strategy
Arms-Length Strategy
Build or Buy Strategy
CURRENT STATE: SPAGHETTI SOUP – MULTIPLE REGULATORS
35
97% 84%
Source: Author’s analysis and GAO-16-175, “Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness,” March 2016.
Depository
institutions
Federal
ReserveFDIC OCC NCUA FTC CFPB SEC Banking Securities
Non-depository
entities that offer
consumer
financial products
or services
Small business
online lenders
Broker-dealers or
other securities
and derivatives
markets
intermediaries
?
FDIC: Federal Deposit Insurance Corporation
OCC: Office of the Comptroller of the Currency
NCUA: National Credit Union Administration
FTC: Federal Trade Commission
CFPB: Consumer Financial Protection Bureau
SEC: Securities and Exchange Commission
State Regulators
Safety and soundness oversight
Consolidated supervision or systemic risk-related oversight
Consumer financial protection oversight
Securities and derivatives markets oversight
Financial Stability Oversight Council member agency
Currently little oversight of small business online lenders
Federal Regulators
POSSIBLE AREAS FOR REGULATORY ACTION
36
97% 84%
1. Borrower Disclosure: “SMART Box”; Borrower Bill of Rights
2. CFPB: Data Collection – Dodd-Frank Section 1071
3. OCC: Nonbank Charter
4. Broker Oversight: Borrower’s “best interest”
5. Joint Third-Party Guidance
6. Financial Innovation Office(s)
ONE GUIDING PRINCIPLE: “DO IT SMART”
37
97% 84%
Small
business
marketplace
lending
FinTech
GovTechRegTech
Small
business
marketplace
lending
Small business lending is at the intersection of FinTech, GovTech, and RegTech
ONE GUIDING PRINCIPLE: “DO IT SMART”
38
97% 84%
Small
business
marketplace
lending
FinTech
GovTechRegTech
Small
business
marketplace
lending
Small business lending is at the intersection of FinTech, GovTech, and RegTech
1. Issue clear, succinct, joint
guidance
2. Engage industry
3. Use technology
4. Be data driven
HBS WORKING PAPER
Small
business
marketplace
lending