As we come to the close of a tumultuous year, the fintech industry is looking ahead to new policies and technologies to help power a recovery in 2021. A key part of recovery is focusing on the survival of small businesses, which are looking to lenders and community banks to provide much-needed capital to help them keep doors open and rebuild after COVID-19 is hopefully a thing of the past.
With a new administration, the health and well-being of small businesses will take on a renewed sense of urgency, keeping small business lending in the spotlight. In addition, banks will need to make bigger investments in technology to reinvent themselves for a digital world and meet the capital needs of small businesses.
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Here are four predictions on what may be in store for fintech and small business lending in 2021:
Fintech will be key to small business recovery
Fintech solutions are quickly becoming integral to business survival. Fintech platforms fill a key gap in small business lending, providing loans that some banks may find less appealing (just look to the 2008 financial crisis). Fast forward to 2020, and the rollout of PPP proved that non-bank lenders in this space have the technical know-how to get even the smallest of loans to at-risk businesses. Fintech companies will continue to play a critical role in helping more small businesses access the help they need to rebound and recover from the devastation of 2020. You can trust they will step up to help disperse the next round of PPP when it’s enacted by Congress — probably more efficiently than before with “lessons learned” from the first round.
Low federal interest rates will open new opportunities
According to the Federal Reserve, near-zero interest rates are likely to last until 2023. That’s not all terrible news for lenders however— this provides an opportunity to charge more for short-term, needs-based loans that today’s small businesses are seeking. In turn, lenders are able to access more security and higher margins in the same deal—something rare in higher interest conditions. By meeting the small business need for short-term capital today, lenders can be better positioned for future opportunities and revenue streams that will continue to produce profits through 2023 and beyond.
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Banks will compete with payment processors for lending
The alternative lending space has been a hot area for innovation, especially with payment platforms like Square, Stripe, Shopify and Uber that haven’t traditionally handled lending. These payment processing companies have a variety of advantages over traditional banks, especially when it comes to data. Because the platforms own the payment streams of many small businesses, they have access to a wealth of business performance data that can be used to make more well-informed loan decisions. And as the transactions remain on one platform, these companies have additional customer insights, allowing them to further deepen customer relationships without needing to invest more in customer acquisition. As a result, these companies will continue to strengthen their presence and activity in the small business lending space throughout 2021.
The new administration looks promising for small businesses
Small business success is an important priority for the incoming Biden administration, which is also great news for lenders. Moving into the new year, we can expect a number of meaningful initiatives designed to breathe new life into small business stability. The Biden administration plans to expand access to $100 billion in low-interest business loans by funding state, local, tribal and non-profit lending programs in heavily minority communities and strengthen Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), and the Community Reinvestment Act (CRA) as well as the introduction of tax breaks for small businesses who offer employees retirement savings programs.
In addition, the administration plans to overhaul the PPP program to help small businesses obtain relief quickly and easily and expand lending through the expanded Small Business Opportunity Fund. The administration also proposes an auditing process to ensure funds are being distributed to businesses that genuinely need it. These collective efforts will help small businesses, particularly those owned by black and brown people, stay afloat during continued uncertainty.
Lenders will need to act quickly and decisively to partner with small businesses and provide them with the funds and resources necessary to recover from one of the most challenging years in history. By leveraging the power of technology, innovative lending approaches and low interest rates, small business lending will help maintain the health and vibrancy of our small business communities in 2021 and beyond.
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