Community banks have a competitive advantage in small business lending due to their relationships and personal attention, finds a
recent research paper by two noted economists.
All banks use relationships in addition to hard data such as financial statements when lending to small businesses. But large banks focus on professional referrals and are more likely to use business credit scores.
Small banks, by comparison, focus on community involvement and personal attention. That allows them to grant exceptions in underwriting policies based on existing loan and depositor relationships. Further, they have a speed advantage in approving small business loans, finds the paper, authored by Temple University professors William C. Dunkelberg and Jonathon A. Scott.
The paper examined the CSBS 2018 Community Banking Survey and compared its findings to recent studies by the FDIC and National Federation of Independent Business. It is one of a series of papers that take an in-depth look at the results of the CSBS annual survey, which this year included 521 community banks from 37 states.
Small banks do have a disadvantage when it comes to ancillary products and services. While community banks tend to offer deposit services, larger banks are more likely to offer advice on strategy, product development, operations and management succession due to their scale. That may even out over time as community banks expand their technology-based services.
Competition on small business loans relies on geography, however. Rural community banks view other banks of the same size as competition, while in urban areas, community banks are also competing with banks between $1 and $10 billion in assets. And those banks are growing concerned about the competitive threat of fintech firms, the paper finds.