A New Era in Lending: Setting SMBs Up for Post-Pandemic Success

In 2020, the Federal Reserve along with the Small Business Administration (SBA) approved $523 million in Paycheck Protection Program (PPP) Loans and then tasked banks with distributing the money. [1] This lending continued earlier this year when an additional $35 billion was loaned to businesses.

The 28 million small and midsized US businesses (SMBs) recipients were selected based on certain preset conditions and eligibility requirements and were asked to use the funds to survive.  At the time, these loans were vital to these businesses but today there are many that still require assistance if they are to stay viable. This need presents a significant opportunity for banks to continue helping in many ways. In this article I will be touching on a few specific areas.

It begins with loans.

I know what you’re thinking—didn’t these companies just get loans? That is true and while the money they received helped get them through COVID-19 it wasn’t enough to help solidify their future. Many banks will be able to help but they cannot disperse these funds with a blind eye. Quite the opposite. They will need to implement a rigorous process that allows teams better judge which businesses will be able to repay their loans. This includes creating a model for various scenarios such as V vs U vs L recovery curve that address various employments rates and provision for these losses accordingly.

In addition, more and more will begin to introduce a risk assessment component or, what some people are calling, a COVID-19 Threat Score which will become a core component of the loan origination process.  Whichever name you give it, these can feature sectoral variations which show, for example, that hi-tech and digital industries are performing better than the Hospitality & Travel sector. With this type of insight, banks can steer clear of potential high-risk loans moving forward.

A great example of this is UK-based OakNorth Bank. Working with PNC Bank, OakNorth rolled out a COVID-19 vulnerability rating, which scores loans from 1-5 based on their exposure to the new economic environment. The rating is based on multiple factors, including liquidity, debt capacity, funding gap, and profitability and also integrates over 130 proprietary COVID-19 stress scenarios with regional overlays, incorporating assumptions for impacts on critical financial metrics such as revenue, operating costs, working capital, and CAPEX.

Over time, these systems can be expanded to include a diverse set of scores. This additional criteria will help banks assess the future fitness of businesses from different industries and how vulnerable they are to factors such as environmental, health, and market threats.

While these scoring systems will be increasingly prevalent, banks also need to look beyond the loan which are not the only option banks have to help as businesses move along this slow path to recovery—according to The EY Future Consumer Index, 25% of respondents believe it will take years to regain the level of financial security they had before COVID-19.[2]

This lengthy recovery presents an opportunity for these financial institutions to embrace an approach that blends empathy and responsible banking. Here the focus is on becoming a trusted supporter that’s committed to the bigger picture—helping viable businesses get back on their feet.

For those not sure where to begin, the United Nations Environment Program (UNEP) launched a Finance Initiative designed to help banks support their customers. The UNEP Finance Initiative’s coalition includes more than 220 banks from over 60 countries. These organizations share practices, solutions and the lessons they have learned during the COVID-19 crisis. You can read more about it here.

Banks can also help by tapping into their data. In an article titled, “How banks can successfully emerge from COVID-19,” EY touches on how data gives banks the opportunity to provide “real-time, integrated solutions including treasury, legal and risk management services” and connect banks to their clients’ infrastructure to reduce cost and enhance efficiency.

With data banks spot anomalies and uncover "patterns that affect their business." Armed with this insight, they can then work together to build “integrated ecosystems of trusted providers to connect different customers and foster growth opportunities." Navigating a market landscape that is becoming increasingly competitive with the emergence of more LendTechs, this provides banks with a strong competitive advantage.

Another data-related avenue that banks are exploring is sharing information on customer deposit accounts. At first glance that might seem like a violation of customer trust but this is all part of a government-backed initiative where the goal is to extend credit to people who have faced major hurdles when it comes to borrowing. This is a big step and it helps consumers who lack credit scores but have demonstrated sufficient financial responsibility. Companies that are purportedly taking part include JPMorgan Chase, Wells Fargo, and U.S. Bancorp.

This post-pandemic period is uncharted territory for banks. In addition to pivoting to remain viable as a business while protecting themselves from potentially devastating losses, financial institutions that are victorious will be those which step up and help SMBs rise to prominence once again.

[1] https://www.bloomberg.com/news/features/2020-12-18/desperate-small-businesses-await-fresh-aid-with-or-without-flaws

[2] https://www.ey.com/en_us/banking-capital-markets/how-banks-can-lead-the-post-covid-19-recovery-for-consumers