Jeff Judy

Jeff's Thoughts - May 20, 2015

Competing with Nontraditional Competitors

When it comes to a variety of financial services, especially small business credit, banking is no longer the only game in town. I discussed some alternatives customers can now choose to avoid things like using credit cards to pay for purchases or to obtain credit for business projects in an earlier e-zine titled, "Will 'Financial Services' Mean You for Future Customers?"

More recently, Mike Milan addressed these new sources of lending competition on Banking.com. In particular, he focused on what it takes to compete with options like crowdfunding or peer-to-peer lending.

The first thing it takes to compete, of course, is awareness of the problem! If you don't see these alternative approaches as competitors, you cannot respond to (and beat) them.

Fortunately, I believe awareness of this challenge to community banking is growing. Along with my earlier e-zine article, I conducted a simple poll of my readers about how seriously they take these alternative services. I asked what the appropriate attitude should be toward alternative sources of basic financial services, and only 6% thought these alternatives would always remain minority players in our marketplace.

More than half of the respondents (55%) thought they had "the potential to be disruptive", with another 26% agreeing that this threat needed a response. A further 13% thought the alternative providers were "already significant players" in our marketplace.

But I sometimes wonder if that awareness translates into action, and if even those results stop too easily at the "potentially disruptive" stage. In his article, Milan shares FDIC data showing that in late 2014, banks were seeing a small decrease in commercial loan portfolios. On-line alternative services, on the other hand, showed a 175% gain!

Milan suggests that business owners were quietly dropping out of the bank's portfolio, perhaps without the loss even being noticed, much less understood. He goes on to say, "There once was a time when you didn’t start a business without an accountant, a lawyer, and a banker. Recently, people don’t even consider a banker as part of the equation, or as an afterthought if at all."

Now, Milan's focus is on the response to this threat. At the top of the list is marketing to the local community. In his mind this goes beyond "community events" to individual interactions with all the businesses in the market.

I'd add that we have a great opportunity to piggyback on the existing "buy local" movement. Many people are paying serious attention to how far their vegetables travel before they buy them. Won't those same people listen when you point out that you can provide credit services with a local touch that neither a megabank nor an online lending site can match?

Milan also emphasizes streamlining the loan application and decision process to keep up with the online competition.

I'd say, do you even know what you are competing with? Sure, you've read about crowdfunding and similar services. But have you visited those sites? Have you explored the experience alternative lenders offer their customers?

Awareness of a threat is not enough to craft a winning response. If you don't know, firsthand, how alternative lenders look and feel to their customers, you're not prepared to beat them at providing credit to the small businesses that are relying more and more on these alternatives to help them reach their goals.