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Banks, FinTechs and the PPP: lessons learned

Julien Courbe Financial Services Leader, PwC US May 14, 2020

There’s been a lot of talk about how COVID-19 is pulling the future forward. Major consumer and business trends that have been in flight for years are now facing their outcomes as a result of the pandemic. And this is happening in a matter of weeks. 

One early example is retail. The slow evolution from malls to e-commerce is now meeting an expected surge of closures and bankruptcies — and it’s very possible the industry may change forever. Or take higher education. Tuition costs have increased more than 5% a year over the past two decades despite a national student debt crisis1. Will the global experiment in virtual learning change whether college is worth the cost?

Banks have a slightly different perspective. The industry might not see outright change, but many trends will likely accelerate. In fact, one of the topics that comes up in almost every conversation I’ve had with CEOs at banks large and small is the need to leverage digital services. It’s now crystal clear. 

Big banks, small banks, non-banks

The Paycheck Protection Program (PPP) is the centerpiece of the US economic relief packages. Normally, government programs aren’t ideal case studies for transformation. But these aren’t normal times. 

In a microcosm, PPP has been a great equalizer. Despite the influence or size of any given bank, nobody had a head start. The program gave community banks a chance to demonstrate their capabilities and non-bank FinTechs an opportunity to more fully participate in the regulated banking system.

By some measures, small lenders more than held their own. In Round Two of the program, lenders with less than $1 billion in assets approved more than 20% of all loans despite a 6% share of industry assets2. For the first time ever, the Treasury and the Small Business Administration included non-bank lenders to participate in the lending programs.

For one thing, there were very unique volume and timing aspects of the program that tested standard credit policy and operational processes. But non-bank FinTechs also brought technology, automation, broad data sets and reach into the far corners of the small business market in order to help distribute loans effectively.

As bank leaders look to drive their transformations and rethink their operating models, the inclusion of FinTechs into the financial system and the reliance on automation and end-to-end process structure could be a barometer for how the industry will likely operate. 

Deeper bank-client involvement to expand the addressable market

Many banks made big changes after the financial crisis. Some doubled down on the retail consumer while others exited capital intensive businesses. Those that didn’t adapt likely missed out on new distribution opportunities (market expansion) or had a less than ideal business mix (pressure on returns). 

Today, it’s all about how banks might adapt to digital services, automate these services and identify new product opportunities. 

One gauge of success in the PPP was the ability to quickly modify operations to deal with new requirements. Pandemic or not, this requirement is needed more and more — not just for business agility but also resiliency. Some FinTechs have the ability to verify borrower information, perform know-your-customer and anti-money laundering requirements and access payroll records. They were flexible to new market needs and quickly adapted because of end-to-end integration and connections to varied sets of data.

This process structure allows for the automation of systems. Granted, the structure of the PPP put a premium on automation to expedite applications, but it also allowed lenders to take small business applicants they had never dealt with before and onboard them quickly.

It’s also important to acknowledge how critical the access to a range of data was to administer the loan program. Some FinTechs, for example, run a majority of back-office operations for their clients — payroll, accounting and supply chain have huge financial interdependencies. 

As banks move forward, a critical differentiator is likely to be how they expand beyond basic banking services to more deeply blend in with the operational elements of their business clients. Take a global manufacturer that has bank accounts in many countries and transacts in multiple currencies, for example. Can a bank absorb more transactions services such as payroll or transfer pricing to make financial operations more seamless? Or can it offer supply-chain finance as a service? Whether the catalyst is a pandemic, more protectionist policies or just the normal course of business, expanding supply-chain finance to dynamically hedge for the economic implications or help with changing supplier terms might be more well-suited for a bank. 

From a growth perspective, banks need to always look beyond their current market. Digital services remove traditional boundaries, and that in turn makes it easier to expand the addressable market. But this should be done carefully and where there’s a natural link (e.g., accounting, payroll, lending, cash management). Institutions that expand their proven business model into new related markets will likely see greater retainment and broader data sets, potentially leading to creative new product opportunities and sustainable growth.

1. US Bureau of Labor Statistics, " Consumer Price Index for All Urban Consumers: Tuition, Other School Fees, and Childcare in U.S. City Average," April 2020.
2. US Small Business Administration, "Paycheck Protection Program (PPP) Report: Second Round," May 2020. Also, US Federal Deposit Insurance Corporation, "FDIC Quarterly Banking Profile, Ratios By Asset Size Group - December 2019," March 2020.

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