Small Banks' Speed Advantage Threatened by Online Lenders

Community banks often brag how quickly they approve loan applications—small bank loan officers, they say, aren't forced to wait for authorization from the corporate office in another city.

Now that selling point could be usurped by a group of online lenders, who say they approve loans in a day or less. Kabbage, an online lender based in Atlanta, says applicants can get an answer in "fewer than 7 minutes."

"We've removed the human element and the fax machine," says Eric Burd, vice president and general manager of CapTap, a New York online lender that competes with Kabbage. "One of my central value propositions is that no bureaucracy is in the way."

CapTap, Kabbage, On Deck Capital and other online lenders say they move faster for several reasons, including streamlined online application forms and fewer underwriting restrictions. They also tend to focus on small-business lending—a far less intensive loan-review process than residential mortgage lending, for example.

It also helps online lenders that they don't accept deposits and thus are virtually unregulated.

"Frankly, community banks just haven't been able to invest in new technology," says Andrea Gellert, senior vice president of marketing at On Deck Capital, of New York. "Because of all the regulatory challenges, they've had to invest in new compliance measures."

Many community bankers would be open to using online applications and other technological tools to make faster loan decisions, says Trey Maust, co-president and chief executive at the $121 million-asset Lewis & Clark Bank in Oregon City, Ore. But most community banks use a business model that requires more hands-on interaction with borrowers, he says.

"Community banks still like to truly know their customer, so I would view the strategy as more of an entree to a comprehensive relationship," Maust says.

Maust says that once a potential borrower provides the documents that are typically requested — such as financials, tax returns, liquidity verification and corporate legal documents — his bank can underwrite and approve a loan, on average, within one week.

Other banks are said to take longer, though industrywide data is hard to find.

If online lenders' speed claims are true, the upstarts could grab a big part of the small-business loan market, says Jim Miller, senior director of banking at J.D. Power in Westlake Village, Calif.

"There is a significant advantage if an application is turned around the same day," Miller says.

Online lenders either supplement, or replace, traditional scores supplied by credit bureaus with their own data. CapTap, for example, uses data compiled from the $2.6 billion of loans made over a 10-year period by its parent company, Capital Access Network. Those data points include the average balance in a customer's deposit accounts, and a historical look at debit and credit card sales through merchant-processing data.

Community banks and large banks, on the other hand, still rely on the old ways, Burd says.

Dave Seleski, president and chief executive of Stonegate Bank (SGBK), a $1 billion-asset bank in Fort Lauderdale, Fla., agrees, based on his time at the community bank and former jobs with large banks.

"It's all based on credit scores and on historic losses," Seleski says.

Some small-business lending opportunities don't go to community banks because they are unwilling to lend to borrowers with "no business plan, no collateral and their income is not where you want it to be," Seleski says.

Community banks also seek borrowers who "want the human touch," Seleski says. But that might actually work against them and in favor of online lenders, Miller says.

"One fear associated with a loan application is the fear of rejection," Miller says. Some consumers say it's "a more comfortable experience if it's online, because the rejection isn't as personal."

The discussion about online competition exposes some fallacies in community banks' longtime sales pitch, some experts say.

Greg McBride, senior financial analyst at BankRate.com, dismissed the notion that a lender makes a faster decision if it has less bureaucracy. Any institution—community bank, megabank or online lender—can move fast if they're dealing with an applicant with a clean credit history.

"Any characterization of application loan speed by bank size is a rash generalization," McBride says. "How quickly the loan is approved is often more about the borrower than the financial institution."

The applicant with a low credit score or other financial red flags will cause issues for any financial institution, and will slow down the approval process, Maust says.

"The process is more difficult to navigate or shuts down completely once something doesn't fit into the underwriting box," Maust says.