Small business is big news again. As reported by American Banker in their recent article, Gruenberg emphasizes 'vital' role of relationship banking, FDIC Chair Martin Gruenberg talked about the importance of small banks, small businesses, and personal relationships. “Relationship-driven lending practices remain vital to small-business lending and economic stability for banks of all sizes,” said the Chairman, “even in an increasingly modern and competitive banking system.”
In his remarks — delivered to the 12th Annual Community Banking Research Conference at the Federal Reserve Bank of St. Louis — Gruenberg said the FDIC's 2024 Small Business Lending Survey report found that, despite technological advancements in the industry, small-business lending remains a largely personal affair.
"From the smallest to the largest banks, small-business lending is generally underwritten and approved by people … [and] is one of the forms of lending that has remained the most consistent and traditional in how it is conducted," he said. "This survey also affirms that the community banking model of small-business lending remains highly competitive in today's financial market, and is still vital for our communities."
The agency carried out the survey in 2022, and found that “despite the shifts in the way many Americans interact with their banks — using banking apps over visiting physical branches, for example — small-business lending has largely kept its emphasis on personal relationships and physical interactions.”
And, according to Forbes’ Small Business Statistics of 2024, small businesses are still a big deal in this country. “Recent data from the U.S. Small Business Administration reveals a remarkable figure: 33.3 million businesses in the United States qualify as small businesses, making up 99.9% of all U.S. businesses and employing nearly 62 million people. This number not only reflects the dominance of small enterprises in the business sector, but also shows their significant role in generating employment and contributing to economic stability.”
Needless to say, there is no underestimating the role that community bankers play in our small business-driven economy. As a trusted financial partner, community bankers have a unique opportunity (some might say responsibility) to support small business owners and entrepreneurs in achieving their goals and driving success. And, at the same time, differentiating themselves from their competitors; the larger regional, national and neobanks. How? Simply by addressing, in the trusted-relationship-way that they do best, the critical challenges that small business owners face.
After all, one of the key advantages of the small community bank is its ability to provide personalized financial guidance tailored to the unique needs and goals of each small business owner. By dedicating time to understanding the specific challenges and opportunities facing business owners, community bankers can, and historically have, customized solutions that help them achieve their goals; whether it's developing a business plan, managing cash flow, setting up savings, checking and merchant accounts, or exploring financing options.
And small businesses definitely need their community bank’s partnership. The Zebra reports that 66% of small businesses face financial challenges. Their greatest concern? Access to the capital that is critical to fueling growth, expanding operations, and taking advantage of new growth opportunities. As a community banker, you play a vital role in providing that capital. By working closely with business owners to understand their financing needs and risk profiles, you can structure loan packages that help them achieve their growth objectives.
In the American Banker article, Chairman Gruenberg points to just how important these close personal relationships are, especially in the critical area of financing. The FDIC survey reported that “human oversight is a key component of small-business lending and for this reason, only 3% of respondents said that they have fully automated their loan underwriting process.” That is not to say that small banks have shunned technology; they haven’t. Thirty-one percent of banks of all sizes reported that they rely on some kind of financial technology service in at least one stage of their small-business loan procedure, while another 22% said they are considering integrating fintech. Even so, human interaction is still front and center. Only 5% of banks surveyed allow borrowers to complete the loan process virtually and a majority of banks require customers to visit a branch to complete the loan process. "Nearly all banks emphasize high-touch, staff-intensive practices,” said Gruenberg.
On the topic of “high touch”, according to the survey, community banks are far more likely to hold meetings between decision-makers and small-business applicants, providing real-time qualitative evaluations that highlight strengths that credit scores and other financial data might overlook. The FDIC official went on to point out that community banks are "twice as likely as large banks to use the loan officer's assessment of an applicant as part of their underwriting process," and that “such comprehensive underwriting lending practices grant community banks more flexibility and responsiveness in lending, which large banks often cannot match. These practices set community banks apart and are worth preserving and supporting … a failure to do so would undermine an essential pillar of our economy.”
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