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The Future of Small Business Lending · Leaders in Lending

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You're listening to Leaders and Lending from Upstart, a podcast dedicated to helping consumer
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lenders grow their programs and improve their product offerings. Each week, here,
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decision makers in the finance industry offer insights into the future of the lending industry,
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best practices around digital transformation, and more. Let's get into the show.
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All right, Well, thank you guys for joining the podcast today.
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I'm joined today by Chris Christopher, Chris, Chris Pushcar, Chris Pushcar and
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Christina. And what constitutions are you guys with with Eastern Bank? Okay,
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excellent? And you guys are on the Small Business Banking Committee here it's CBA
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correct one, chair and vice chair, Chair and vice chair excellent. We
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got all the power and knowledge in the rooms to be a great conversation.
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I know you guys had the committee meeting yesterday and I want to talk about
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like the number one things that were on your mind. And I imagine a
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lot of the conversation had to center around the kind of disruption in the banking
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environment that's happened due to the failure of Silicon Valley Bank, the failure of
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at your bank, how customers are reacting, what are you what are you
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hearing from that? Well, what's the reaction been to those things? Yeah,
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it was a big topic of conversation yesterday in our committee meeting, for
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sure, And I think there's a couple of different things, right, So
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one is how can we help service those customers if they choose another financial institution
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that they want to bank with. And then secondarily the safety and soundness of
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our own financial institutions and really working on retention of our clients, and then
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the safety and soundness of the industry as a whole. I think those are
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really the big things that came up yesterday. With that, you have a
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lot of deposits moving banks, and so you know, as you think about
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that, you want to be able to take on new clients but also retain
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your own. And then you're also worrying a little bit about fraud and people
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having you know, account takeovers or fraudulent wires, so you're really trying to
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protect clients against that as well. Say, how has the trend been in
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the I imagine there's this immediate like I got to pull my money out of
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the banks that are you know, that are feeling And then how has the
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conversation evolved with clients of your own banks, or what you're hearing from other
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members of the committee in terms of like withdrawing funds for all just going,
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hey, I want to move to one of the big guys that feel like
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they have an almost explicit guarantee if we're all deposits, Like, how is
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that is that conversation involved with clients? How does it feel right now?
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Yeah? I mean I think it's different for each client, right, So,
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I think some you have a simple conversation and talk to them about the
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safety and soundness of your financial institution. They're satisfied with that. Other cases
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they want to take advantage of more FDIC coverage and they have a product or
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service that can help them with that. And in some cases they do want
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to diversify and they want to take a look at multiple banks for their relationships
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and maximize their FDIC coverage. So you really just have to have a conversation
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and find out what's right for that client. Yeah. Yeah, maybe.
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What I would add is a lot of the banking that we do is relationship
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driven. So the trust, the knowledge of the bank, the presence in
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the community, they know, they know us, they sort of what we
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stand for. And what we're about. The folks that I feel like have
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a lot of questions are probably folks that don't have the relationship, is close
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of relationship or the media has really spun this to their advantage and they're getting
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a lot of hits and a lot of likes and a lot of job but
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not everything that's being shared is understood. So it's just piecing together and having
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a person that they trust that they'll have the conversation much. Yeah. It
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also reminds me why this like underlying nervousness about this whole experience, in that
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I feel like community banks, while often maligned by online I think a lot
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of was like a digital experience. The big banks kind of have an advantage
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in investing, but in the small supporting small businesses where really you do rely
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on relationships. I really worry if we lose if this causes us to weaken
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our community banks, our regional banks, it'll really weaken our support for small
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businesses generally that really rely on those relationship based banks in their communities to support
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them. And it's kind of that would be a real blow to our ability
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to support small businesses and economy generally. If we were to lose support for
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the community banks because there was nervousness about deposits and that caused them to go
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elsewhere. It's start and what we have seen actually in the business bank space,
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that is the spot they're moving the least they're moving retail because they all
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get it so easy. Yeah I'll just get something online and I don't really
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care. I want the insurance. In the commercial side, right, they're
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likely dealing with the CFO, may or may not have a relationship, and
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moving billions is easy because they can do it in chrunches. But we haven't
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seen the movement in the business banking space interstically. And I've seen some,
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but not not nearly to the degree. And we actually heard from Furry knows
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and that is industry. Um uh, don't so that from the industry.
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Small business deposits have been a little more, a little more spread out between
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larger financial institutions community banks and some online banks as well, and some smaller
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credit unions. So I think that's good news for us as a whole company.
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Have there been any when you see a lot of inflows and outflows?
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I mean, the number one thing that my mind gets made because I come
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from the technology space is like fraud, and that just looks like a moment
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where I go, hey, as an attacker is as a bad actor,
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man, this is a moment where a lot's happening, a lot could fall
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to the crack. It seems like a time to attack it, so to
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speak. Not that it's not advice for any with the attackers out there,
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but it seems like a moment where you have excessive risk compared to maybe a
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normal environment. How are you seeing increase in fraud and how are people adjusting
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to kind of trying to support inflows and outflows that need to be done to
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support those businesses and also be careful about fraud when people are moving in large
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sums of money and our frequent basis, Yeah, we haven't really seen it
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yet, but we are concerned about it, and I think the key is
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to really make sure you have really good conversations with your customers and advise them
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of potentially what's out there. There are some products and solutions on the treasury
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services side that can help you protect against fraud, but a lot of it
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is just your own internal controls as well, and so we really try to
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be be mindful of that and have those type of conversations with clients and it
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is fascinating. The biggest fraud that we see is count takeover, so they
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perpetrate, they act like they're in the business owner, tell their CFO.
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Right. So it's a tricky spot because it's it's still the advising guidance that
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when you're connected to your bank, like if you're and you have some of
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the services, you either see it or you don't open the email or right,
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you sort of prevent that that takeover. But should it happen, then
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the hope and the expectation from the bank is, hey, can you just
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help us with this when you fill in what we lost because we you know,
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obviously we didn't direct this to happen. And it gets back down to
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relationship and just that tight connectivity which you can't get from the biggest or the
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finchecks. Like they're not offering relationships, right, they're offenising great services.
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But that is that is our strongest suit. Interesting, I wanted to maybe
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pivot away from recent troubles to longer term trends short and I'd love to think
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about, like what are the innovations you guys are seeing happening in the SMB
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space, like what are new products, new offerings, new capabilities. And
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one of the things that got me thinking about this was the experience during PPP
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where we really like implemented new processes digital processes, often very rapidly, some
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more successfully those It felt like this kind of like accelerated learning moment, say
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hey, we can actually do something pretty different if we have to, and
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customers actually, I mean there's like think MC guarantees and all sorts of reasons
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that was a different kind of program. But I do think that the capability
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to quickly access lending and funding was a really interesting moment in time where we
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saw that, we saw how customers reacted. Do you see that driving trends
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towards faster adopt Like, what are the trends you see in the SMP space
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in terms of products? Yeah, I think there's a few. I think
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you hit probably the number one spot on which is you know, coming out
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of PPP, the digital experience for the customer was really end to end and
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they really appreciated that because it helps with have simplicity, it helps with the
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speed, and I think there's a demand for that, and so I think
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you'll see an increase in that right now, some banks have that it's typically
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for smaller dollar loans, but I think that will continue to grow. I
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don't know if you get the largest of the large loans ever done that way,
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but certainly there's probably tens of million CR loans. Are probably not the
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ones going instant digital. I'm probably gonna right because it will take building.
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They need a two fifty to five hundred thousand. Those are things that I
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think that you could look at. I think the other thing is we see
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a big spike in demand for SBA lending, so really understanding the programs that
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are offered through the SBA is really important for your institution so you can offer
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those to your clients. And then we're starting to hear a lot of information
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around special purpose credit programs, which are really set up to serve the underserved
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community within small business businesses that are owned by people of color, women,
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veterans, LGBTQ, people with disabilities, and so those programs are gaining a
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lot of traction now and I think that will be great for the industry as
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well. Do you have any thoughts on much I had not heard this statement
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about SPA and are the SPCP of special purpose credit programs. Well, do
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you know what's driving the demand? Like is there something behind that or like
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what do you think is causing people to be more interested in those programs?
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Right Nocause that's a really fascinating statement, and I was like totally unaware.
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So I'm just kind of curious what's underlying that. It's our ability to serve
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more people most products. So it just really opens up the number of folks
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that we can help because the guarantees allow us to be able to be much
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more generous scrutiny like time in business, right, like we'd want to see
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more history with a traditional Yeah, we can do more to help serve them.
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Yeah. I think there was some information too that was obtained through PPP
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where some of those underserved communities weren't provided PPP loans as quickly as maybe they
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should have through the funding process. You know. I think that that put
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some heat and light on the industry to make sure that we found a solution
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to help those borrowers. And so I think that plays into also what Christina
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is mentioning and then the SBA trends. I mean, I think that there's
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some great programs out there that if you partner well with the SBA on programs,
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you can probably lend more customers than the typically would be comfortable with because
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they provide guarantees on the loans, and so I think really trying to use
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those products to get more money out into the small business community is essential.
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So I'm going to ask this question, how does one partner well with the
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SBA. I mean, I think one of the big complaints I heard around
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PPP was just it changed a lot and then the integration would like the guarantee
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is getting it was not easy. And I feel like this is the same
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question I ask people about fintech partnerships, which is like, I feel like
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there's times that it gets that it works well, and times that it kind
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of gets it's a great idea, and then it doesn't go anywhere. It
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kind of sits on this shelf and doesn't get used because there's not a good
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sense of partnership and like a real operating rhythm. And so do you have
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you said that if you do SPA partnership, So I'm curious, what do
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you have advice on how one does partner well with the SPA or make these
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things more or less or if you're approaching an SPCP and that's a very specific
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kind of program that I think can feel risky or a little nervous people to
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emplay like how do you do that well? Like what are the secrets at
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tips to like actually execute well in that space. Yeah, I think with
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SBA, I think one of the things is first of all, having a
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strategy around it. It's hard to just sort of dabble in SPA lending because
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you really need to stay on top of the SPAH make sure you're following the
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program guidelines, and so having a strategy I think is core for number one.
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Number two, I would advise have a good relationship with your local SBA
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office, can bounce questions off of them or scenarios off of them, and
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they can provide you feedback and insight. And then I think you need to
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have good controls in place to make sure that you're not putting those SBA guarantees
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at risk from the servicing work that you do behind the scenes. And I
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think if you do those things well, it's a very beneficial program for both
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us and our customers. That's exactly right. I agree with everything you said.
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What you when you get the experience under like going from you know,
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doing a few to doing hundreds is a very easy transition, and you have
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those controls and and the folks in place that this is not a place where
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you try to reduce staffing and hope that it all goes well. You staff
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appropriately, you follow the controls, and you can really scal it very quickly
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in a meaningful way. Fascinating. Is there a reason now that I mean,
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you mentioned PPP, but do you think there's a reason that interest in
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these things is increasing at the moment? And I want to kind of wrap
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that in with a general question around demand around small business line thing because you
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know, I think you've got the committee was talking about some trends around demand,
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talking to a little about like what's driving demand and why you think those
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programs are particular saying more demand now as it driven buyer experiences and pp and
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the real PPP and the realization that there's people out there that need these funds
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that we weren't serving before, or is there some underlying business reason that people
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are kind of like, hey, this is a moment to really invest in
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these things. Yeah, I mean, I think in terms of loan demand,
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just to start there, I think that's a tricky topic right now.
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I think it's a very uncertain for this year and possibly into next year because
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of all of the challenges right now in the economic environment that we have,
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which is rising interest rates, inflation, labor shortages, supply chain issues.
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So the willingness or a desire for small business to borrow money right now is
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a little uncertain because they're dealing with uncertain time. So we'll sort of see
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where that lands. But I think, you know, when you think about
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the sp CPS and serving underserved communities within small business, I think there is
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a demand for what we have sort of already talked about. But also I
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think you know, SBA has also come out and said they want to be
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able to help banks funnel more dollars into the communities, both in terms of
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underserved communities but also just small business in general. And so you know,
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really trying to think about ways to get creative to lend more money to our
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customers who are in need, I think is critical well said, and I
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think they want advising guidance, so very more interested in taking time to spend
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with their bankers now and getting that. So we feel really good about making
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a difference in spending time and having those interactions and is Chris shared probably your
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larger, more stable clients or funding their own transactions and acquisitions or whatever investments
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are making in their business. So it's a perfect balance because there's capacity in
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the market and this is a place we can make it difference. Yeah.
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I do love that focus on making a difference to the communities that the regional
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Community banks. It's just it's really nice. It is. It's was one
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of the big surprises for me. I was surprised. It's going to sound
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bad when I say it this way, but like coming from tech into banking,
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you kind of there's not always a great perspective of tech in the world
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now generally, but of banking, and you kind of you when you get
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inside the world of banking, small business banking, community banking, consumer banking,
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and you realize that people are really just trying to like that's not exactly
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living and gets a wonderful life, but out they're trying to support the communities
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and businesses prudently, but as much as we can. All right, I
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want to ask about one more technical thing, which is I know there's a
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discussion about ten seventy one rulemaking final rules for the uninitiator, not in the
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space. What is the ten seventy one? What is the process is going
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on? And what are we talking about there? Yeah, so if you're
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familiar at all with HUMDA, which is I'm familiar with HUMDA, all right,
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we're a good starting point, yep. So they're trying to capture sort
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of race and gender information a time of application and sort of trying to replicate
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something like that on the small business side. Interesting, so when they can
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take a look at application data, they can see then more clearly, you
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know, are there certain races or genders that are not being served the way
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that maybe some others are right, And so it's a way to really sort
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of safeguard that fair lending is taking place as much as possible in the small
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business community. So we're anxiously awaiting a final ruling. It's due by March
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thirty first, and so once we get that ruling, we're right up against
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the wire. Once we get that ruling, then we all have, we
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believe, eighteen months to implement those processes, and you have to be able
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to capture the information upfront, but also to be able to provide reporting the
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reporting on it exactly. Any thoughts on what's going to follow on from that,
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because there's the kind of there's the capturing the data, there's the reporting
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of the data, and then there's the are we happy with what the data
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is telling us? And what are we going to do about in the areas
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where maybe we're not happy? And that's an area I mean, we've spent
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to be honest, that ups are a lot of time because I think there's
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this very tricky issue, to be honest, approval rates, actual credit worthiness
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of the underlying applicants, the applicant pool versus the maybe demographic pool of small
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business owners in your community. What's the sense of what follows on from and
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reporting on the data in terms of actions or expectations about what the data is
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telling us. Yeah, I mean I think it's a multi step process,
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right, So first is implementation. Second, then you have to go through
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process of a period of time of actually getting meaningful data. Won't you know,
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in the first few weeks, maybe even in the first few months,
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you won't have it, but certainly six months a year you'll start to have
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that data. I think it'll be interesting for the industry as a whole.
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To see sort of where everything lies. And then as your own financial institution,
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how do you compare to the overall averages? And from there you may
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implement strategies to do things differently, to either improve things, or change things
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or tweak things. So I think as a whole it's going to be a
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really interesting exercise, for sure. I would add I agree they've been Chris
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said, that's why some of these special purpose programs are so critical. If
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we can do these at the same time and align those like, hopefully we'll
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all be happier with some of the outcomes, for sure. So we're in
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New York State, So the first move on it is we're interested to find
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out how consistent with ten seventy one in term of implementation, because some of
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the things New York State wants us to collect in New York is not legal
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to collect another places. How do we marry the two together and make sure
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that the customer experience isn't wildly different depending on in the banker's experience if you
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have a remote banker, where they're coming in from. Because try really hard
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to do the right thing by everyone at a time of application and sort of
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through fulfillment. So that the cadence of some of the additional things being rolled
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out, it will be interesting to see what we learn because New York State
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is going to go first. What do we learn and then how do we
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hopefully learn and help is the ten seventy one ruling continues to follow on a
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New York likes to be first. DFS is a little a little aggressive on
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that, and it is difficult if you operate in multiple jurisdictions to have you
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can have rules where you're required to do this here and prohibited from doing it
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there, and that becomes very hard, particularly in a world where at least
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some of our transactions are virtually mediated. So maybe the banker is supporting customers
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in both states going I don't want to do the wrong thing. I'm trying
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to do the right thing. But man, it's not easy when the rules
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very so much does exactly right. New scale that the technology that we will
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all use to support it, whether it's you know it's now or you know,
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um, folks are doing a really great job of helping build this in.
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It's going to take them time too held it in, and so we're
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trying to do a bridge and sort of them a manual way of doing it
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in the meantime. So we're hoping for some grace in that period, but
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we're certainly all want to do the right thing and do more loans in this
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space. Has anybody been looking, I'm just you can just tell me know.
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But you know, there is the like the CFPB you published the BISG
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methodology to estimate ethnicity, race gender from applicant. You know, I think
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it takes like zip in last name roughly um, And I'm curious if anybody,
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if anybody has been previewing what they're ten seventy one results might look like,
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because you can, like, it's not the same as collecting the way
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home it is, but you can kind of like get too roughly the same
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point with approximations doing that at least understand what does that look like. I'm
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curious if that's something the industry has been like trying to get a preview on
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where they're going to land by using some of that methodology. If you're just
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going to implement the final rulemaking and then and see where we land. Yeah,
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I mean, I think it's hard to speak for every financial institution.
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For my own personally, we absolutely have and We've actually lost a special purpose
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credit program just a few weeks ago, so we had to get data from
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our institution to justify the program and get it approved. So we definitely did.
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I would be surprised if most institutions aren't either thinking about an SPCP or
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at least preparing for ten seventy one and saying, you know, give me
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an estimation of sort of how we fall here, where do we think we're
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going to land to start? But we did a similar think being with the
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New York statedf so we had to get out in front of it. So
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we are feeling good about you know, where we're at and some of the
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initiatves we were taken in that space as well. Awesome. Well, let
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me as we come to the end of this conversation, what are other big
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trends or topics we should talk about when it call it comes to a small
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business bank. I mean, we've kind of had the things are on my
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list, but what's is there anything else that's top of mind for you guys
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or you think that's a big emerging trend it's going to be impacting the space
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the next year or two. Yeah, I mean, the only thing I
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can really think of other than what we've spoken about is really just providing customers
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information, right, And I think we think a lot of products and services
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and we need to do that as well. But I think small businesses are
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looking for information about how to run their business more effectively, more efficiently,
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how do I grow? And so a lot of banks are thinking about education
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for their small business clients. And that can be done through a website,
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it could be done through seminars, it can be done through your sales staff
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and making sure they're educated to be able to have those types of conversations.
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Most likely banks are probably looking at all the above in some way, shape
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or form. But I would think that would be the other big trend in
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the industry that I think we're looking at over the next year or so.
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That's spot on, I would I would say. The thing I would add
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is it'll be really important that we help navigate customers through these inflationary times.
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Just Chris shared some of that we talked about yesterday. This is a really
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difficult time for a lot of small business owners. But whether they borrowed and
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now it's just so much more expensive, or the labor how do we help
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through the advice and guidance and education navigate probably just like all the banks,
21:07
not all the small businesses make it. But how do we do our part
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to keep them as successful for as long as possible, or how do we
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help them find other partners to maybe come together with our industry experts, Like
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how do we do our part to be the convener so they can continue to
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run their business? Yeah, it is kind of It is crazy to think
21:27
about the economic environment that we live in. It's very disruptive. And I
21:32
saw this really ridiculous to me comment somewhere that like, you know, depositors
21:37
should lose their money in the context for bank run because it was their job
21:41
to be choosing the bank they worked with. By looking at the finance,
21:44
I thought, your perspective is that the CFO of a small business should be
21:48
looking at the balance sheet of local banks and determining who's making the most prudent
21:52
risk management decisions in terms of interest rate risks with their excess deposits, and
21:56
that's the balance on the system. Is Like, I think they're just trying
21:57
to figure out how to manage their own sheet through this, and they're not
22:00
so worried about it because it is it's kind of unbelievable think that we're supposed
22:04
to be looking at the interest rate hedges that SPB maybe could have put on
22:07
the bonds that were buying, or whether they were buying too many long duration
22:11
bonds at too low of a time, Like, yeah, I don't think
22:12
that was a small They get their own things to worry about. We should
22:17
be helping them through that as opposed to asking them to be our safety and
22:19
soundness check on the asset management the bank they're working with. Well, and
22:22
you hear some conversations too around well, these businesses shouldn't have had more than
22:27
two hundred and fifty thousand than any one institution, and it's very difficult for
22:30
small businesses to do when they're working about, you know, making payroll,
22:33
paying their vendors, they have money coming in, Like it's not just easy
22:37
to park two fifty or two fifty or two fifty here. So I think
22:41
to your point, you know, they make the best decisions that they can
22:44
with the information there they have, but you know, they're worried about running
22:47
their own small business and they wear multiple hats within that, so it's tough
22:49
for them to keep track with everything that's happening to the mark in the banking
22:52
and environment. Yeah, yeah, and I totally agree, And I think
22:57
there's this kind of weirdness to that answered, like wow, they should have
23:00
opened accountable like that just is very strange to me. Regulatory arbitrage that's taking
23:04
place that doesn't doesn't really meet the spirit of what the insurance has meant to
23:08
do, like, oh, I'll actually ensure all your money just work with
23:11
a whole bunch of different banks and spread it around Like that feels weird,
23:15
and so I just wonder if there'sn't gonna be some change in the way regulars.
23:18
And I don't like you guys say this, but I think if we're
23:19
saying, hey, well we really introduce just open up accounts with ten banks
23:22
and then somebody's going to come in and be a digital layer that like automatically
23:26
spread your money that we've just we're not really adding anything. We've just added
23:29
a whole bunch of complexity to the land in the same place, and we
23:30
ought to find a simpler way to help people. It is true, like
23:33
doesn't take a very large business to need more than two hundred and fifty thousand
23:37
just to make monthly payroll, let alone accounts receivable or invoice payments for a
23:41
different thing, like, that's not that much money in the context of a
23:44
business is paying a decent number of people, and I don't think it's unreasonable
23:48
for them to expect when they put it into Like I was kind of stunned
23:51
when my financial advisor called me and said, Jeff, we got some money
23:52
in the check account. We want you to move it out because it's safer
23:56
in a money market And I thought, Man, what world do we come
24:00
to where I'm getting the advice to pull my money out of a checking account
24:02
and put into a money market account for safety, not for yield, for
24:06
safety, And I thought, well, that's that's an interesting It's an interesting
24:10
time, and I think we're going to have to support the small businesses and
24:12
the consumers that like consumers about more than two fifty thousand dollars in the bank
24:15
account, I feel like are relatively savvy typically and understanding the risks are taking.
24:19
But the small business that's not a massive business, and it does not
24:23
make sense to me that we're putting them at the risk for Like, having
24:26
looked at the balance sheet and the different asset purchases, by the bank that
24:30
they're working with. That just seems crazy. Yeah. Absolutely, and it's
24:32
fluid. It's not like they put it in their ones and set it like
24:34
to continuously expect the small business owners to look at all the transaction. Yeah.
24:38
I pull up that quarterly report in my bank every every quarter and go,
24:41
hey, what what are you guys doing? I mean tread ten year
24:45
treasuries? Why we should be in the twos and being the twos man?
24:48
It's the interest rates are moving like that. I don't I think that's the
24:51
right expectation. Well, thank you guys both so much for joining to say,
24:55
this was a fascinating conversation. I certainly learned a lot. I'm sure
24:57
the audience as well, So I appreciate you to tech the time to do
25:00
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