A Community Bank Takes on Alternative Lenders

Small businesses are proverbially difficult for banks to serve — but don’t tell that to Hugh Connelly, president of Univest Capital, a division of Univest Bank and self-described “small business growthologist.”

Univest, a $2.2-billion Philadelphia-area institution, has turned to the cloud to increase efficiency in its small business lending. For Connelly, this leap of faith into new technology is simply a return to what community banks have been doing all along.

“Community banking is the original P2P,” he said.

Karen Mills, former head of the Small Business Administration, wrote last year that the heterogeneity of small businesses made it harder to underwrite loans to them, and furthermore, that $100,000 loans are just as expensive to originate and serve as $1 million loans, but yield smaller returns. Connelly disagreed that no two small businesses are alike, saying that, for businesses seeking a $250,000 loan, for example, “at that level, they look quite similar.” Put differently, a restaurant and a hardware store may have different cash flows and expenses and seasonality to their revenue streams, but if both are healthy businesses, it doesn’t make any difference to the lender.

So why have banks had a hard time serving small businesses? “It’s all in the delivery method,” Connelly said. “Prior to mobile, you had loan officers effectively dialing for dollars. Maybe three out of 100 people you talked to both have a need and are bankable. And then you needed tools to vet those people.”

This led to the dreaded credit committee, which would consider the merits of the borrower — slowly, painstakingly.

Mobile changed all that. “Mobile solves the equation,” Connelly said. “Now you have a credit committee in a button. It’s just, ‘click,’ and there’s the decision. Prior to this, it was hard to profitably and efficiently serve this market.” Mobile banking can ease the loan officer’s workload by offering fast decisioning, handling exceptions, generating documents on the fly, and accepting electronic signatures. It can also provide bankers with data about prospects and the market that previously would have required a great deal of time and research.

Univest engaged cloud-banking provider nCino’s loan platform to bring its lending up to speed, and took advantage of the Salesforce-based platform’s adaptability to bundle in third-party services to enhance loan offerings, Connelly said, with a product known as Univest Prime. One popular bundled service for Univest customers is identity theft protection. Because small business owners have so much personal information tied to loan products, they are often concerned about the safety of that information, Connelly said.

“The nCino platform allowed us to partner with LifeLock for identity theft and protection, as well as employ a kind of Costco model of purchase protection and extended warranties,” Connelly said. Univest began working with nCino about a year ago, he said, but have been up and running at full steam only since February.

The efficiency gains the bank has seen have been dramatic — Connelly said the bank’s underwriting and servicing cost has been reduced by a staggering 92%. Loan approval rates have also increased to the mid-80s. How big an improvement is this? “The embarrassing truth is we didn’t even really know our approval rate beforehand,” Connelly said.

Univest may be small, but Connelly has ambitions to make waves in small business lending and rally other banks to his banner. “Peer-to-peer lending gets all the publicity, but it’s really more Wall Street investing than Main Street,” he said. “Banks have been doing this forever, this is our business. We tried working with some of these peer-to-peer lenders — the guys didn’t know what they’re doing.”

Banks looking to lend to small businesses can certainly win on rates, and perhaps with cloud-based solutions, they can also compete on experience. They will likely always deal with higher overhead, however, and thinner margins, and face difficulty scaling. Small banks are far more likely than large banks to approve small business loan requests — 48% versus 13%, according to Mills — and there are still a lot of small banks. Cloud banking could just be the matchmaker that brings small banks and small businesses, so long estranged, back together.