I am the Director of an SBA microloan program in the midwest, and I can honestly say that I am not sure if small businesses will even need a local bank to secure a business loan in 2020. As a microlender we are working with small business owners who have been denied by a traditional bank, or simply don’t qualify for a bank loan because their loan request is too small for the bank to make any profit on the loan.
Our goal with the microloan program is to graduate our borrowers to traditional finance, but in nearly three years of running this program I have not had one of our 50 some clients graduate to a traditional bank. These businesses are actually growing just fine without a bank loan. Of course it would be nice to have a line of credit, and they could grow faster with a larger business loan, but they are surviving and many are thriving.
For many of my clients I am starting to suggest alternative financing options like:
Kickstarter – Non equity based crowdfunding
Kabbage – Transaction based financing
Prosper – Peer to peer lending
OnDeck Capital – Innovative financing for Main Street
LocalStake – Equity based crowdfunding
With the explosive growth many of these companies have already seen, or are poised to see in the near future, I am convinced that the traditional bank is in a lot of trouble when it comes to small businesses. Here are 2 key reasons that I think the traditional bank won’t be a financing option for small businesses in just 7 short years.
1. Overhead – First of all, the banks have built and leased building after building in order to get a physical presence in their market. The problem is the average small business does not believe their local banker will lend to them, so they go straight to Google to look for financing options. Now the local bank can try to advertise on Google in the competitive small business lending category, but now they are competing with alternative, internet based lenders who do not have the overhead associated with all of the office space required by traditional banks. New lenders don’t have to worry about a vault, security systems in the building, utilities, mowing the grass in the summer, removing snow in the winter, etc, etc. In a world where you can move money around with a click of a button, it is only a matter of time before these highly efficient alternative lenders will be able to completely dominate the traditional banks because their cost structure is so much lower. This is the exact same story that is playing out in the retail world. Amazon.com is crushing the competition because they can offer lower prices, online lenders will be able to do this soon, if not already.
2. Technology Cuts Out the Middle Man – A bank is just a middle man. The bank takes your deposits and then uses those deposits to lend to credit worthy projects that will keep your money safe and earn a positive return. The banks are profiting from your deposits and what do you get to see from it? .01% interest in your savings account? This can’t last forever. Depositors are going to demand more from banks, but because of their cost structure the banks won’t be able to offer competitive rates when compared to other options like Prosper.com and LendingClub.com which are peer to peer lenders. These peer to peer lenders cut out the middle man, or at least much of the overhead associated with the middle man. You can lend directly to individual borrowers or you can invest small amounts of money into many different borrowers and earn a return on your investment. The platform will take a fee, but at least you will earn some return on your deposits. Now I understand that peer to peer lenders are not FDIC insured, and you investment may not be liquid, but I think over the next seven years these platforms will improve and offer certain levels of insurance and liquidity to directly compete for your deposits.
At the end of the day, I think the traditional banking system could be in a lot of trouble if they do not innovate. The problem is that regulations make it incredibly hard for banks to innovate, which could ultimately lead to their slow death. What do you think? Will small businesses even need the traditional bank in 2020?