A survey of small business credit published by the Federal Reserve Bank of New York has revealed that online lenders are less popular with small and medium enterprises (SMEs) than big banks.
The survey, which was reported in the Financial Times, asked successful loan applicants among US SME’s to rank their satisfaction with various lenders. Small banks proved most popular at 80% satisfaction rate, followed by credit unions (78%), CDFs (77%) and big banks (61%). Trailing last with a satisfaction rate of just 46% were online lenders.
Similarly, 19% of respondents were dissatisfied with online lenders, compared to 15% of big banks and 5% of small banks.
On first glance the results contravene the perception that customer dissatisfaction with incumbent financial services providers, and big banks especially, has been a big factor in the success of fintechs.They also cast doubt on the idea that fintechs excel at customer service.
However other aspects of the survey make better reading for new online lenders, defined by the survey as “non-bank alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital and PayPal Working Capital”.
When asked for reasons for their dissatisfaction with respective groups of lenders, 33% respondents cited high interest rates in respect of online lenders, in comparison to just 6% for big banks and 3% for small banks.
Meanwhile, online lenders scored much better in terms of dissatisfaction with the difficulty of the application process (26% compared to 44% for large banks) and the wait for credit decisions (7% to 44%). Such a result will be succour for fintechs who will cite it as evidence that their technology is superior in terms of creating a better user experience.
The survey also shows respective approval rates for credit applicants and online lenders outscore big banks by 62% to 54%. This result supports the idea that although small businesses are most likely to first apply to traditional lenders, many will have more success with online lenders. In addition many of these online lenders are targeting riskier businesses than the incumbents.
However, the high cost of capital and customer acquisition is still clearly an issue for online lenders and the main reason for both high interest rates and a growing trend for fintechs to seek collaborations with traditional incumbents, not least in the corporate banking sector where a number of banks have already teamed up with online lenders.
For example, Spanish bank Santander has been working with Funding Circle for more than two years.