Small Business Lending & the Internet

RMA Journal, The, Feb, 2001 by Lloyd Reichenbach, Mark Hill

National Penn Bank builds solid customer relationships using an innovative Internet-based loan-processing tool. It helps the bank increase small business loan volume, margin control, underwriting consistency, decision speed, and customer satisfaction while reducing costs and delinquencies.

National Penn Bank is using a new, comprehensive banking solution for small business lending that is remotely hosted and accessible through a browser. Using Internet-based Application Service Provider (ASP) technology, the solution simplifies small business lending.

National Penn Bank now manages its complete small business loan application process--from inception through document preparation--with this new technology. Without hiring additional loan officers, National Penn has been able to:

* Increase its loan volume.

* Improve the profitability of those loans.

* Reduce delinquencies.

* Make unsecured loan decisions up to $100,000 in about half an hour.

The Marketplace

A 1998 study by Mendis Corporation, the North Carolina-based market research firm, showed small business as the fastest-growing segment of U.S. business. The study also found that small business accounts could be two to three times as profitable as consumer accounts.

Bankers and nonbank lenders have long known that small business lending can be a strong, profitable anchor from which to secure more of a borrower's business. However, until now, the process of developing leads, completing applications, accessing credit bureau reports, and performing other due diligence for loan applications, such as underwriting, pricing, and decision-making, was time-consuming, expensive, and not always that profitable.

TowerGroup analyst Regan Wong observed in a recent American Banker article that the cumbersome nature of small business lending is expected to drive demand for the much simpler online application process. "Small business loans," Wong predicted, "may even become a commodity."

Though it may yet be early to confer commodity status on such loans, National Penn's Internet-based ASP technology small business lending solution is the much simpler online application process Wong mentioned.

National Banks and Brokerages

Community banks, with their close, often personal, relationships with small business owners, long viewed small business loans as a forte. Now, Internet-based "virtual" banks and brokerage houses are targeting the same small businesses with loan offerings. Small Business Banker noted earlier this year that, "...institutional underwriting--running thousands of loan applications through a computer--has paid off handsomely. Some banks, Wells Fargo & Co., in particular, seem to have mastered the art of using a machine to process thousands of loans under $100,000. The technology has allowed the bank to make quicker credit decisions, in turn generating more loans." Small Business Banker also reported that last year Wells Fargo & Co. briefly surpassed Bank of America as the top small-business lender with $9.88 billion in loans.

The larger threat posed by large national banks' small business lending is that they are often able to acquire all of a borrower's accounts after establishing the credit relationship in a small business loan. They, like a few large nonbank lenders, have the technology and marketing sophistication necessary for effective "data mining," using direct mail, statement stuffers, and other personal solicitations to cross-sell existing customers on other accounts and services. Existing customers typically qualify for favorable rates as multi-account holders, making for attractive loan pricing that is much more competitive for "nonrelationship" institutions.

Brokerage houses, notably Merrill Lynch, American Express, and, more recently, Morgan Stanley, have demonstrated aggressive and effective cross-selling initiatives with existing account holders, especially with their higher-end customer base.

Virtual Banks

Internet-based "virtual" banks, with lower overhead costs and apparent technological mastery, should be able to offer small business customers competitively priced loans. They may yet become serious competitors for small business loans.

As demands on business people's time grow and the working day lengthens, some aspiring business loan applicants are finding their free time begins about 10 p.m. With the Internet banks' 24/7 hours and easy access via computer, they can make their loan application pretty much when and where they wish. And, though virtual banks' market is still largely confined to "early adopters" of banking's new technologies, theirs may well become a niche favored by time-starved business owners. People want easy access to credit. With ever-increasing sophistication among the customer and easy access to virtual banks via the Internet, the virtual bank segment can only grow as an important competitor in the future.

Acknowledging this new reality, National Penn Bank expects to have a business loan application link on its Web site by the time this article appears. Meanwhile, the bank is partnering with MoneyZone.com and PrimeStreet, two among many commercial loan application-takers in the marketplace today. Most of these resources not only solicit and receive loan applications, they also forward the completed apps, complete with Fair, Isaac/RMA [SBSS.sup.sm] scoring (Small Business Scoring Service), to their banking partners. At National Penn, this is viewed as yet another new business portal and probably not the last one the bank will see.