Lending’s Future Hinges on Diversity, Technology: SBA
The days of faxing in mountains of documents and face-to-face meetings with lending officers may be coming to an end.
That’s one of the predictions SBA Administrator Maria Contreras-Sweet shared during a Wednesday morning online session titled the “Future of Lending,” which was presented by Washington newspaper Politico and the Independent Community Bankers of America.
A growing number of small business owners are more nimble with technology and often expect others they work with, including government agencies such as the SBA, to be just as deft, Contreras-Sweet said during the session attended by CU Times.
“My son is here. If I say to him ‘if you want to start a business, you have to go stand in line at a center.’ But he might say, ‘well, I’m used to seeing things on YouTube,’” she illustrated. “We must understand where the population is going. We have to make sure we’re as nimble as small businesses.”
To that end, the SBA is using technology more to market and communicate about the agency’s programs in a virtual way, Contreras-Sweet said.
“Financing looks different these days. Now, people are swiping into their mobile phones to make deposits and using things like Square. There’s interaction with bitcoins. We, as a regulator, have to stay current,” she said.
The increase in minorities and women who are starting their own businesses will also change the future of lending, Contreras-Sweet said. SBA lending to African Americans was up 29% over the last year and, citing data from the Urban Institute, women and minorities are three to five times more likely to be approved for an SBA-backed loan than a traditional loan.
Still, one of the session’s moderators noted that it is still difficult for minority business owners to get loans compared to their counterparts. Contreras-Sweet said it’s critical to look at other factors during the application process.
She pointed to the SBA’s announcement Tuesday about its new credit score that will combine an entrepreneur’s personal and business credit scores for loans under $350,000. The goal here is to look more at risk characteristics, rather than socio-economic factors, to determine if a potential borrower is creditworthy, she added.
“Normally, I don’t like to look at someone in a universal way. One thing I look at is character, which is usually not used in scoring,” Contreras-Sweet said.
The moderator, who pointed out that only 2.3% of SBA loans were issued to African Americans, asked if the agency is planning to set a more reasonable target. Contreras-Sweet said the SBA will look more closely at how many are going into corporate jobs versus starting their own businesses. This will help to determine the life cycle of capital access, she explained.
The SBA is also encouraging more micro loans with community banks and community development financial institutions through its Community Advantage program. After a track record is established, minorities can then transfer over to a traditional bank or credit union loan.
Javier Palomarez, president/CEO of the United States Hispanic Chamber of Commerce, was also a panelist on the future of lending session. He said the federal government’s track record is abysmal when it comes to tracking minority businesses but touted Contreras-Sweet’s recent appointment to lead the SBA as a way to close that gap.
“The federal government hasn’t met its own self-imposed goals. In announcing her priorities yesterday, Maria mentioned an increased focus on communities of color and those that are disenfranchised,” Palomarez said.
Another group with growing influence is women-owned businesses, Contreras-Sweet said. Their companies have grown by 20% in just five years, according to the SBA. Currently, women entrepreneurs are considered under-represented in only 83 of the 260 industry categories, limiting their ability to receive federal set-asides, she noted.
“We need to make sure we’re circling back and doing outreach to find out what the impediments are,” Contreras-Sweet said. “We have tools for veterans and we have Hub zones but I would also like to see more tools for women.”
The session’s guest speakers were asked about trends such as peer to peer lending and crowdfunding and whether they will impact the future of lending.
Palomarez pointed to Goldman Sachs’ $500 million investment in a program aimed at entrepreneurs that have had some success but need an infusion of capital. They can participate in a six-month training program at a local community program with a curriculum developed by Harvard and other entities to learn essential business skills.
Goldman Sachs serves on Hispanic Chamber of Commerce’s advisory board, Palomarez disclosed.
“We’re finding that oftentimes, they may be a good florist but didn’t go to business school and don’t understand accounting fundamentals,” Palomarez said.
During an earlier part of the session with different guest panelists, one speaker said financial institutions will compete more with entities in Silicon Valley when it comes to the future of lending and capital access.
Different tiers of mobile banking with products targeted at college students, for instance, will also continue to have an impact, said the same speaker.
When asked about the role credit unions and community banks, one of the panelists said they play a very important role in providing short-term credit and relationship banking.
“Credit unions and community banks understand (the consumers’) needs and concerns. Unfortunately, there’s a larger group of people that are unbanked,” the panelist said. “There’s a place for all financial institutions to serve these groups based on their needs.”
Earlier this year, the United States Postal Service announced it was considering offering products and services such as reloadable prepaid cards, mobile transactions and small loans. When the moderator asked for thoughts on the idea, one of the session’s panelists dismissed the model.
“I don’t want banks delivering mail so I wouldn’t want the post office delivering financial services,” the person said.
Given the number of innovations that continue to emerge, the panelists were asked if regulators and policymakers are doing a good job keeping up. Most agreed it’s difficult to stay abreast.
“Unless you have the regulator sitting next to the innovator, you’re always going to be behind. You can’t stymie innovation but at the same time, there has to be protections for everyone,” said one panelist.