Why Top Lenders Chose Not to Build a PPP Platform In-HouseMarch 22, 2021
The digital age, especially since the onset of the COVID-19 pandemic, has certainly made it easier to access knowledge that helps us reach our goals independently and on our own terms. As a result, it has become easier for bankers and lenders to feel that they can build a DIY solution to many different problems and opportunities they might face in their business. But there are times when a DIY strategy can create more problems than it solves. It turns out that in the small business lending industry, companies that rely on outsourced SaaS solutions developed by financial technology experts may be faring better than those who decide to go it alone. Recently, the Paycheck Protection Program (PPP) has demonstrated this fact in no uncertain terms.
Recently, the Small Business Administration’s offering of the Paycheck Protection Program has provided one clear example of how using an established digital lending platform like Biz2X can give lenders many advantages. But these rewards extend well beyond the time-limited PPP. The right platform makes servicing all SBA and private commercial loans more efficient for lenders like banks and credit unions, making your institution more competitive long-term.
A Look Underneath the Hood: What Do PPP Platforms Do?
Banks and credit unions that are SBA-approved lenders for the PPP have been facing this question since the PPP was first announced in March 2020. PPP loan applications and PPP loan forgiveness needed to be serviced quickly, digitally and without disrupting the existing business operations that these lenders have tried to maintain during their efforts to recover from the coronavirus pandemic. As lenders evaluated these potential solutions, they began to discover that there are a number of key aspects of lending platforms that made the biggest difference for PPP loans.
Most PPP lending platforms are customizable. So the answer for lenders is very often that these software platforms can do as much or as little as you want them to. But accessing all features of a robust looks something like this.
- Provide small business owners with the exact application they need to complete for a PPP loan—no more, no less, and no more time spent gathering irrelevant information. PPP eligibility requirements are built into the software for rapid decisioning.
- Give customers the convenience of electronic document uploads. Documents are organized and accessible to your staff, which is critical during the underwriting process and gives your compliance team peace of mind in the event of an audit.
- Streamline your small business loans by automating time-consuming compliance tasks.
- Complete risk assessment and underwriting in a fraction of the time it normally takes. Quickly communicate decisions to borrowers and respond to evolving rules and regulations. For businesses that may be holding on by a thread due to the pandemic, speed is essential.
- Process loans through the Small Business Administration more efficiently with direct integration to the SBA E-Tran platform.
- Get funds in your customers’ hands fast once approved—well in advance of the 20-day timeline required by the SBA.
Competition Intensifies Among Small Business Lenders
The number of lenders that administered SBA loans pre-pandemic was a relative handful compared to the 5,000+ lenders that have participated in the PPP. For well-entrenched SBA lenders, the launch of the PPP tripled the amount of competition for business immediately. And many of those established institutions faced a new kind of competitor: digital credit unions and banks, non-bank lenders, and fintech startups that operated 100% digitally and embraced sophisticated fintech solutions.
These non-traditional lenders began to eat up more than their fair share of the PPP loan application volume in the early days of the PPP. Companies like these controlled just over 10% of the banking industry’s assets, but wound up administering nearly 30% of all PPP loans. Lenders who relied on face-face branch office meetings and paper documentation suffered under lockdown conditions and couldn’t take advantage of the PPP to grow their business.
It’s fair to say there were a lot of hiccups in the PPP roll-out. Complex eligibility, documentation, and compliance requirements caused delays and confusion. American Banker called the program a minefield for institutions struggling to develop new loan processing protocols. But lenders who relied on superior loan origination software were able to untangle the mess that was hampering traditional banks and preventing merchants from accessing the funds they needed to survive. These banks saw an opportunity and jumped on it, steering clear of the hefty costs and lengthy timelines that come with custom platform development. Even after the second phase of the PPP was launched in 2021, the program still wasn’t easy to administer. For lenders who struggled to develop their own automated processes or were still relying on manual processing to serve their customers, the impact was lower performance and costly delays that resulted in lost business.
How Did PPP Lenders Benefit from Automation?
Digital lending platforms like Biz2X have been widely hailed as the innovation that saved the Paycheck Protection Program. Small banks and credit unions who opted for automation surprised the industry by leaving old-school banks in the dust. They were able to make the decision to become PPP lenders and meet the unprecedented demand from borrowers more quickly, without taking on undue risk or sacrificing their brands’ individuality.
Reports vary, of course. But some lenders describe processing PPP loans thirty times faster with a digital lending platform than without one. And this particular productivity spike doesn’t entail weeks of training and employee frustration. Biz2X’s PPP platform, for example, integrates easily with the credit bureaus and world-class technologies lenders rely on, from FICO to Finicity.
In short, banks and credit unions who signed on to an automated PPP lending platform spent less on executing crucial compliance tasks. They managed their risk more effectively. They provided speedier, more accurate service to borrowers when they started accepting applications. And in turn they earned greater customer loyalty—which translated into more business and more profit.
Why Outsource PPP Lending Technology?
The decision to outsource loan processing is not an easy one to make. So how did so many lenders ultimately make the right call when it came to PPP? There were a few major reasons why digitizing the PPP application process made sense for those banks and credit unions that took the digital plunge.
Let’s talk first about resources. The cost of developing a one-off platform for digital loan processing is high. Expenses vary, but they could range in the hundreds of thousands, or even millions, of dollars to develop a lending platform from scratch. That’s if an institution even has the development talent to accomplish the task. Lenders who go it alone face months of costly trial and error and the business disruption that comes with it.
With a SaaS lending platform, the process is much simpler. For instance, Biz2X’s customers transition seamlessly to a small business lending platform that affords them all of the advantages a DIY solution provides and then some. It’s not a rigid off-the-shelf product, but rather one that easily accommodates lender configuration, from branding and personalized customer communications to tailored workflow procedures and decision rules to govern underwriting.
Serve More Customers More Cost-Effectively
It costs as much to process a $1,000 PPP loan as it does a $100,000 commercial loan. It could cost a bank just as much to process a loan at 1% interest—the going rate for PPP loans—as it does to process a normal commercial loan yielding 10% interest. Biz2X’s platform acts as an equalizer, helping lenders profitably serve a more diverse customer base, with a wider range of products. Microbusinesses, minority entrepreneurs, and other market segments traditionally underserved by the credit industry become a newly plausible customer base when lenders can make the financial case for marketing to them. A study by the Harvard Business Review reported that 80% of small businesses seek loans smaller than $100,000. There’s plenty of money to be earned writing small loans, when technology mitigates the cost of processing them. The great thing about digital lending platforms is that these tools enable banks to pivot to the next product or program without skipping a beat. So once the PPP has concluded, it’s possible to stand up other lending products without losing the great customer experience that small business owners love.
Keep Pace with Compliance Changes
PPP compliance regulations have historically been less than transparent—one of the chief complaints of lenders participating in the program. And they remain in flux as the new administration seeks to make lending through the program more equitable. The SBA has also amended the program to allow small businesses to borrow more than once under its auspices. Even the guidance currently published by the SBA explicitly claims a caveat: it hasn’t necessarily caught up with the implications of the American Recovery Act passed in March of 2021. On top of that, SBA forms have been changing constantly throughout the program, causing delays and headaches for the lenders who are running the program.
Automated PPP platforms take the pain out of keeping up with changing compliance regulations. SaaS solutions make it possible to implement all the guidance included in the SBA FAQs or the Interim Final Rules without needing a trained expert at your bank constantly going over the policies in minute detail. The Treasury Department reported a sharp increase in suspicious activity following the launch of the PPP, putting lenders at greater risk for fraud and KYC and AML penalties. How big a risk? Financial institutions paid a whopping $10.4 billion in compliance fines in 2020. It’s safe to say that, as a small business lender, you don’t want any part of that.
Meet Customers Where They’re Gathering
COVID-19 certainly heightened merchant demand for flawless digital experiences in all of their business dealings. But the inclination isn’t new. And in the business credit realm, it’s not going anywhere but up post-pandemic. Will business lunches, courteous service, empathy, and relationship banking still retain their power to drive business? Absolutely. But the most successful relationships will expand and deliver what customers want most: simplicity, speed, transparency, and options—which, when you think about is, is at the top of most lenders’ wish lists, too.
Digital Lending Platforms: A Small Business Lending Imperative
Lenders have an outsize role to play in the economic recovery. Small business owners are counting on the PPP—some for the second time around. More PPP funding rounds may be in our future. And small business owners are certainly going to need help taking advantage of one of the most attractive opportunities PPP loans provide. Lenders will soon see growing demand for processing loan forgiveness applications. Most lenders, of course, are dedicated to providing community support. By automating PPP loan processing, they’ll be better equipped to help keep people employed and to shore up the backbone of the American economy.