Fintech Leads the Way in Fair Lending Practices With a New Kind of 'Relationship Banking' The days of big banks ruling the financial-services space are long gone.
By Kobi Ben Meir Edited by Amanda Breen
Opinions expressed by Entrepreneur contributors are their own.
Until the 1990s, when digital banking was in its infancy, the most advanced pieces of financial technology (fintech, for short) were ATMs. Big banks ruled supreme, and unless you belonged to a community bank or credit union, they were essentially your only choice for small-business financing. Now we're in the era of a different kind of financing giant — the omnipresent tech company — think Amazon and PayPal. However, as we collectively emerge from the Covid-19 pandemic, customers have begun to place a higher value on individual relationships — something still lacking in most of today's lending landscape. Enter fintech-financing companies: personal attention, mutual trust and ethical, data-based processes make for a better and fairer lender and borrower relationship all around.
The big banks — impersonal often means discriminatory
The history of lending is a fraught one. Up until fairly recently, getting a loan for your small business meant pleading your case at one of the banking behemoths, whose legacy of discrimination is well documented. A data analysis of lending practices from 2008-2016 from the National Community Reinvestment Coalition (NCRC) showed "a troubling pattern of disinvestment, discouragement and inequitable treatment for Black and Hispanic-owned businesses." The researchers found that in six out of seven metro areas analyzed, 70% of loans went to middle- and upper-income neighborhoods. Unfortunately, this trend has continued, and even the U.S. Small Business Administration isn't off the hook: Another NCRC test showed that Black business owners were more likely to be denied PPP loans than white applicants with comparable profiles. Generally, the larger the institution (whether it be a huge bank or tech giant), the less likely it is that a meaningful relationship will be formed.
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The death of community banks and "relationship banking"
Small community banks have historically been the easiest route to funding for small businesses due to their deep roots in local economies — despite also exhibiting discriminatory behavior. Local banks are disappearing though, leaving a lending desert that's worse in traditionally underbanked communities. With this "relationship-based banking" gone or almost gone, what will take its place for those who don't qualify for loans from big banks and are wary of the tech giants?
Fintech fills a void
While the phrase "financial technology" sounds cold and impersonal, the sector is helping to mitigate the negative aspects of traditional banking with approvals based on unbiased data and long-term connections between lenders and clients. Fintech firms have built the importance of the client relationship into their ethos. They have married a seamless process with the personalized attention of a community bank. A lot of fintech companies also benefit from a smaller size. Without the labyrinthian layers of large banks, the person who handles your loan will likely remain your point of contact throughout — and be someone you can turn to if problems arise. Fintech firms have a valuable leg up by letting data do the deciding and their team do the client upkeep.
People want to be understood
Customers want to build relationships with their banks and lending companies — it's not just a marketing tactic. An Accenture report noted that 47% of respondents would prefer to open a bank account face to face. This figure would seem at odds with the fact that the majority of banking is done online, but it just serves to illustrate that there is a space for both easy digital processes and a personalized customer experience.
Related: Can FinTech Really Help Small Businesses?
How to forge lasting relationships and keep customers for life
There are a few key ways to establish that connection between lenders and clients — and make sure it remains a valuable one for both parties.
Connect clients to a real person as soon as possible
The key to a lasting client and lender relationship is human connection. Your platform may be digital, but a follow-up call from a team member is crucial. He or she can answer any questions the customer may have and establish a personal connection that can last for years.
Be flexible
People want to feel like they're being treated as individuals with all aspects of their situation taken into account. A key way to accommodate this is by staying flexible and exercising understanding when it comes to payments, policies, etc. If a client feels gratitude, he or she will think of you first when he or she needs another financial product.
Be trustworthy and transparent
As consumers become savvier and savvier, the importance of transparency continues to grow. According to the EY Future Consumer Index, "More than half of the respondents indicate that their future purchasing decisions will be impacted by banks actively supporting the community, being transparent in all they do, and ensuring they are doing good for society." It's easy to connect this to lending as well —customers want assurance that they're dealing with trustworthy companies, and the small-business-financing world is no different.
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Fintech companies are remedying the dearth of personalized attention and addressing discrimination by doing things differently than both legacy institutions and community banks. Data helps applicants be seen as individuals while smaller company sizes allow for solid, long-term relationships.
