Getting Back to Relationship Banking
Daily, I have been reminded by the government, that the signs of economic recovery are all around me. It certainly doesn’t feel that way, but it leads to an interesting discussion about economic change. Small business has always been the axiom of contributing factors to the success of the US economy. But in modern reality, the prevailing thought was that the economy had to be led by banks. The signs of change are around us, but it more likely that the US economy is rearranging itself rather than simply recovering under the old umbrella of Wall Street.
The rapid emergence of crowdfunding, alternative lending, and peer-to-peer transactions strongly indicates small businesses shift away from the traditional banking environment. In the 4th Quarter of 2014, traditional banks commercial loan portfolios saw a 3% reduction, while alternative lenders experienced a 175% gain. Evidence that the economy was reinventing itself, and a new driving force is poised to guide the recovery.
Business owners simply stopped working with their banker, and the banker didn’t seem to notice. Until now. I recently attended two banking conferences where the main theme centered on this topic. I found it interesting that each conference held round table discussion panels, giving equal status to the large traditional banks and much smaller alternative lenders. From an outsider’s perspective, the “big” banks are taking notice of the change as well.
This leads me to the question: “How does the bank become relevant in the small business economy again?” My answer, combine the best of both worlds. People still like to have the interaction with their “hometown” bank, but want the convenience of the website lender. Kyle Enger, known for his thought leadership in the world of relationship banking on the West Coast, said it best. “Traditional banks have to embrace ‘Digital Lending’ in their hometowns to compete.” Here are a few ways how this concept might work.
Marketing to the local community and actively being a part of it. Business owners want to bank with someone they feel comfortable with, and they can rely on. Starting in their immediate area, block by block, farm by farm, bankers have to reacquaint themselves with their neighbors. In today’s fast paced life, which means engaging with them through social media, as well as hosting educational events. An example of an educational event that would help propel a bank’s growth would be a Business Owner Seminar, focused on helping people understand the dynamics of their business through the lens of their financial statements.
Another area is to automate some of the tedious tasks associated with applying for a loan. One of the main reasons the alternative lenders are successful is the elimination of the obstacles between a qualified borrower and the funding of his request. There are software tools, like Finagraph, that reduce loan approval times from weeks to hours. Employing any efficiencies in their process, helps attract potential borrowers. It is simply human nature to follow the path of least resistance.
Lastly, the traditional banks could bundle non-traditional services with their bread and butter products. For instance, they could offer light advisory services or seminars to business owners who have working capital lines of credit. Topics could center on seasonality, inventory control, and identifying the “cash flow gap”. Business owners are hungry for knowledge. As the owner of the relationship, the traditional banker should find ways to create more value for their clients. Continued education satisfies that need and can be applied to the Community Re-Investment Act.
Can the local banker in the traditional big bank compete with the high growth alternative on-line lender? The answer is YES, but they have to get to know their community more deeply, and make it easier to do business. If you provide the value, and make it easy for them to accomplish their goals, you have the winning combination to a life-long generational banking relationship.
Building the local economy one business at a time, strengthens the driving force of the American economy, creates local and regional jobs, and promotes lasting wealth in each community. We are moving in that direction, but banks can accelerate the recovery to prosperity by building the relationships small business owners need.