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Why Banks Lost Small Business Customers Because of PPP Lending

By Karen Axelton
Paycheck Protection Program loans represented to many financial institutions an opportunity to support small business. The outcome was just the opposite for many banks, as their handling of PPP loans cost them those same small business customers.  What caused customer churn during the lending process of PPP, and how can banks win back customers they lost due to poor servicing? 

Did Poor Paycheck Protection Program Loan Servicing Cost Your Bank Customers?

For small and regional banks, the Small Business Administration’s Paycheck Protection Program (PPP) loans offered an opportunity to capture new customers who were dissatisfied with their existing banking relationships.

But a May survey by Greenwich Associates reports 29% of small businesses’ opinion of their bank has deteriorated after undergoing the PPP loan application process. Going forward, the difficulties small business owners experienced could lead to significant customer churn for community banks and other small lenders as the process of applying for PPP loan forgiveness unfolds and if new second-round PPP loan funds are made available.

Battling Big Banks for Business During Coronavirus
Regional banks and credit unions have long faced challenges in competing with big banks to acquire commercial loan customers. Even before COVID-19, new customer growth was a key concern for 25 percent of banks and 43 percent of credit unions heading into 2020, according to a Cornerstone Financial survey. Banks that attracted new small business customers by issuing PPP loans could lose those hard-won customers if they face problems during the loan forgiveness process.

Switching banks is not a simple process, especially for small business owners with multiple accounts at one bank. However, for entrepreneurs who are already exhausted and frustrated by the financial challenges of the coronavirus pandemic, any difficulties navigating the PPP loan forgiveness process could be the final straw that breaks the camel’s back.

Guidance for rolling out PPP loans authorized by the CARES Act was confusing and last-minute; guidance around forgiveness has been modified multiple times, with future changes still likely. Banks face many hurdles to successfully navigating the PPP forgiveness process, servicing loans that don’t qualify to be forgiven, and processing new PPP applications if Congress makes additional funds available.
What solutions could enable lenders to transform these challenges into opportunity? Just as implementing sophisticated lending software helped regional banks and credit unions serve small business clients’ initial PPP loan needs, it can continue to help as the loan forgiveness process rolls out.

The 3 Biggest PPP Loan Challenges for Small Lenders
Challenge: Streamline the loan application process 
A confusing application process with unreliable online systems was the top complaint of small business customers in the Greenwich Associates survey. Part of the difficulty stems from the last-minute nature of the PPP loans. Yes, banks were tasked with rolling out a huge loan program in record time, given that the federal government issued final Paycheck Protection Program guidance literally hours before funds became available. But banks and credit unions that used manual loan application, data input, and document management processes for their commercial loan origination put themselves at an even greater disadvantage.

Many of the same hurdles banks faced in the first round of the PPP will undoubtedly apply to the PPP loan forgiveness application process as well. Already, multiple modifications of forgiveness requirements have been issued, and there are three different application forms depending on factors such as loan size and business size. Time pressures are also at play: Lenders have 60 days from receipt of a completed loan forgiveness application to review it and issue their decision to SBA.

Though lawmakers have not approved additional PPP funding as of this writing, criteria for new PPP loans will likely require banks to collect additional data about borrowers. As of early December, proposed bipartisan COVID-19 relief legislation would make a new round of PPP loans available to small business owners who have up to 300 employees and have sustained revenue loss of 30% or more in any quarter of 2020.

SolutionDigital application management
Small business owners have already moved many of their communications online. Nearly two-thirds (63%) of small business owners in the Greenwich Associates survey report using digital channels as the main way of communicating with their business bank. A whopping 84% said the availability of digital channels is a critical factor in selecting a bank.

Banks that have reliable online small business loan application systems in place will continue to have an advantage as PPP loan forgiveness applications get underway and if future PPP funds become available. Online applications make it easy for small business owners to apply for loans faster, meeting the urgency of their current situation. Digital document storage and processing provides additional data security compared to maintaining paper copies in files. Digitization also speeds the application review process by ensuring greater accuracy compared to inputting or scanning information from paper documents. Combining speed and security for business owners is a great move for any bank.

Challenge: Improve PPP loan decisioning and customer communications 
Poor communications relating to loan approval, application status and forgiveness terms was another key complaint of the small business owners that Greenwich Associates surveyed. As lenders scrambled to review loan applications and comply with the specific requirements of SBA loans, all while dealing with ongoing updates and frequent changes to PPP terms, small business owners grew understandably impatient to get answers about their loan applications. Banks should prioritize clear and effective communications with their customers, or risk losing their trust to feelings of frustration and concerns about a lack of transparency.

Solution: Speed PPP loan decisioning with automated loan origination software
Struggling to review loan applications quickly while also protecting themselves from risk and maintain compliance with Know Your Customer (KYC), anti-money laundering (AML) and other regulatory requirements was a major issue for banks in the PPP lending process. Banks that handled the onboarding process manually found it even more difficult.

The answer is not, as many banks tried to make it in the beginning of PPP, to shut out customers who have not previously held lending accounts with your bank. Instead, automated loan origination software can make it possible for banks to serve the wide range of customers that sought these loans from them without creating undue risk of fraud.

Automated loan origination software that uses artificial intelligence (AI) can save time and allow for faster loan decisioning by gathering and analyzing customer data in the background. By automating the monitoring of customer accounts to comply with KYC, AML and the specific requirements of SBA-guaranteed PPP loans, lenders can ensure regulatory compliance and simplify the loan forgiveness application process.

Detailed data about payroll and other business expenses will be critical as banks evaluate PPP loan forgiveness applications to identify forgivable loans. Software that links to customers’ payroll processing or HR applications makes it easy for lenders to collect real-time information needed to verify payroll data and other expenses. This can greatly streamline the decisioning process for new applications.

Challenge: Enhance customer service and responsiveness
Lack of responsiveness and poor customer service were major pain points for the small businesses borrowers that Greenwich Associates polled. The stress and difficulty of applying for PPP loans was only compounded when would-be borrowers’ questions and concerns went unanswered. To make it even more challenging, most banks were having to learn how to coordinate all of the customer service associates in a new work from home environment they had never dealt with before. But no matter the circumstances, nothing should get in the way of delivering great customer service to your clients.

Solution: Customer relationship management (CRM) software designed for commercial banking
Legacy banking software that siloes customer information by department or maintains it in multiple formats make it difficult for bankers to stay up to date on a customer’s progress through the loan origination process. Regional banks, community banks and credit unions typically lack the robust digital and mobile presence of larger institutions, hampering customers from quickly accessing information about their loans or communicating with their bankers.

Customer relationship management (CRM) software designed for business banking can give smaller banks immediate access to comprehensive customer data. Removing departmental siloes provides a unified view of the customer and eliminates the time-consuming task of searching various records to check information and respond to customers’ questions or assess the status of an application.

CRM software also allows lenders to automate many communications with customers. For example, they can confirm receipt of the borrower’s loan forgiveness certifications and supporting documentation, nudge them through the application process, or request missing data. This not only enhances lenders’ efficiency but also improves customer satisfaction. Automated messaging can even be customized as needed to provide the personal touch that small business customers seek from their business bank.

How Can Banks Better Serve PPP Customers in the Future?
For small or regional banks and their customers, the PPP loan forgiveness process has the potential to be as complex and time-consuming as was the initial loan underwriting. Just as implementing sophisticated lending software helped lenders better serve small business clients’ PPP loan needs, it can continue to help as the loan forgiveness process rolls out.

Given the already slim margins on PPP loans, efficiently handling loan applications, loan forgiveness applications, and loan servicing going forward will be key for lenders hoping to realize profits from the program. Software that can streamline these processes and help banks improve efficiency, effectiveness and customer satisfaction can solve these problems and position banks for a successful future.