Do credit union executives believe that online lenders pose a threat to their small business lending programs? We asked this question to a group of them during a webinar we hosted on July 16. Granted, it was a biased selection given the subject of the event – "Compete and Win in Small Business Lending" – and a relatively small sample, but their response provided insight into how many traditional lenders view these new competitors. I'll have more on their response later.
What do the industry numbers say?
In the U.S., the banking industry held roughly $1.5 trillion worth of small business loans on their books at the end of 2014, increasing by 10.5% year over year. Credit unions saw their lending increase by 12.4%, with approximately $52 billion in business loans on their books at year's end.
There currently isn't a single source of data for the small business lending activity of online lenders. But, for the sake of comparison, industry estimates place the total amount of loans originated by online lenders in the U.S. since the industry's inception about eight years ago at approximately $12 billion. Small business lending activity accounts for a small portion of that $12 billion in total originations.
Online lenders have been growing at a decent clip. Some industry analysts believe that the online lending industry may grow to anywhere from $150 billion to $490 billion globally over the next five years. However, it's clear that they currently account for only a tiny fraction – less than 1% of U.S. total loan volume – of overall lending to small businesses.
What's so exciting about online lenders?
According to a 2014 Joint Small Business Credit Survey Report by several Federal Reserve Banks, 18% of small businesses said they applied for credit from online lenders last year. It should be noted that this is the first time this data has been collected for online lending.
By using technology to focus on improving the application process, online lenders have set a new standard for borrowers. And, particularly in the world of small business lending, this promises to be a game changer.
Mobile-accessible applications and nearly instantaneous lending decisions are a far cry from the average 24 to 36 hours most small business spend searching and filling out paperwork when applying for loans, and the weeks it takes to get back a decision. Not to mention, there's the headache of applying to multiple lenders when the first one turns the business down.
So do online lenders pose a threat to credit unions?
Depending on the headlines you read on any given day, online lenders are either taking market share from traditional lenders and will become the future of lending, or traditional lenders are approving loans at a record pace and online lenders have their work cut out for them. The truth is, this isn't an either/or situation.
Through all these media mood swings, one thing remains constant: Demand for loans from the small businesses in our communities remains high. In fact, on July 28, President Obama signed a bill into law that raised the U.S. Small Business Administration's annual loan guarantee limit to $23.5 billion after hitting its $18.74 billion limit two months before the government's fiscal year end.
Credit unions are quickly taking a page from online lenders. They realize that by launching technology-enabled loan programs, they too can make faster decisions and reduce overall origination costs. By partnering with technology companies to employ the latest financial technologies, they are able to increase the number of loan applications they process, as well as lend the small dollar amounts that member small businesses want, but which they have historically found to be cost prohibitive.
The credit union executives we spoke with during our July webinar are actively looking to increase their support of the lending needs of members and small businesses within their communities. While all of them indicated that they view online lenders as a threat, it wasn't a significant threat. In fact, more than 75% felt that online lenders were a medium to low competitive threat. The general consensus seems to be that even with the emergence of online lending, credit unions will continue to do what they have always done: Provide a high level of service to their members, and make loans to help support their communities at a reasonable rate. Add in a bit of technology, and this is a business model that will be difficult for online lenders to compete against.
Trevor Dryer is CEO and co-founder of Mirador. He can be reached at 503-451-0518 or [email protected].
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