For banks, particularly smaller community banks, technology may be the key to weathering economic turmoil.
The Federal Deposit Insurance Corporation (FDIC) said in a report titled “Bank Technology and the COVID-19 Pandemic” that “the conventional view of the comparative advantage of small banks’ business models focuses on customer lending.”
This conventional wisdom, the report says, means smaller financial institutions (FIs) can obtain “soft” information about potential lenders that would not normally be seen on a loan application.
In fact, as of the end of 2019, smaller banks accounted for 31% of small business lending, according to the FDIC, despite owning only about 15% of the assets.
“However, increasing data availability, advances in statistical classification methods for risk detection, greater computing power and the rise of financial technology companies have the potential to erode the benefits that smaller banks are reaping from their comparative advantage in capturing soft information,” he told the FDIC.
Technology expands customer list
The study focused on how banks’ technology investments could affect their ability to at least sustain and even grow their businesses in the wake of the pandemic.
Broadly speaking, the FDIC found that the more the bank had its “coverage of products installed at non-bank FinTech firms” (resulting in a “FinTech Similarity Score”), the more credit it had from Paycheck Protection Program (PPP) awarded them, measured during the second quarter of 2020 – about 9% more by volume.
“Moreover, advanced technology allows banks to offer PPP lending outside of their market territory, although this more geographically dispersed lending is not crowding out in-market lending. Therefore, technology-intensive banks that appear to operate as hybrids between physically-based traditional banks and less physically-based non-bank FinTech lenders can effectively compete for financial products that are less reliant on a lending relationship,” the study noted.
Regardless, traditional financial institutions are indeed embracing new technologies to mitigate various vulnerabilities (far beyond the boundaries of lending) encountered by their corporate customers. Many FIs are changing the way they look at technology and are looking for specific technical solutions. These innovations include automated account validation and digital lockers, among others.
If we dig a little deeper, 42% of financial institutions consider invoice reconciliation to be an important issue for corporate customers who pay suppliers. 66 percent of financial institutions believe that the ability to offer digital payment solutions is very important to their customers.
Continue reading: How 311 FIs are using technology to address B2B invoicing and cash flow friction