Kevin Jones - August 22, 2019 As I look across the banking industry, I often see trends that I find disturbing. Over the last few years, I’ve observed a widening gulf in the amount of deposits that community banks attract versus the loan dollars they generate, mostly to small businesses.

A specific statistic that illustrates this point comes from a market study by the Institute for Local Self-Reliance (ILSR) a nonprofit dedicated to helping communities grow sustainably from several angles, including banking, broadband, energy, and waste. According to the ILSR, community banks issue a whopping 52 percent of all small business loans, while they hold only 16 percent of the nation’s assets.  

There are many contributing factors to this dynamic, which isn’t in itself sustainable, as banking is predicated on a balance of maintaining appropriate levels of deposits, both demand and time, with the issuance of loans and lines of credit to individuals and businesses.  The community banking conundrum is driven by multiple converging factors, among them competition from big banks for deposits—especially those of a commercial nature—as well as geographic limitations (many community banks have operated more consistently in less wealthy communities, going to places the big banks have avoided). The localized lending that community banks do is a cornerstone of enabling financial inclusion and energizing the American dream.

As a fintech leader, I find it disturbing that one of the larger perceived pressures of community banking comes from our sector. Technology companies in areas such as lending are threatening areas of profitability for community banks. It’s one thing to have your deposit base eroded, but it becomes difficult for community banks to survive this phenomenon in tandem with the erosion of their loan base, especially in small business lending.

I see this differently.

One person’s threat is another’s opportunity.  While I’ll let other fintechs speak to their own models and motivations, I can tell you with complete authenticity that Celero and its brands are developing leading-edge technology, in payments, software-as-a-service, analytics, business intelligence, social monitoring, and sales tools, and we are doing so to fulfill our commitment to help our community bank partners and their small business customers compete and win.

And we don’t limit ourselves to simply selling our own products and services. In our role as strategic partners and advisors, we not only help our community bankers realize a more expansive relationship with their clients, but we also help them connect the dots with regard to all of the tools at their disposal. My colleague and co-founder, Jeff Brown, exemplified this ethos recently, as he explained how our bank partners can increase fee income and deposit balances through payments and funding accounts earmarked for asset-based lending. Deposits are the launchpad for lending capability, and community bank loans provide a significantly healthier injection of capital than alternative lending options. As I stated before, these loans fuel innovative small businesses in towns all across America.

We are convinced that in order for community banks to fulfill their mission and continue to better serve rural Americans, as well as those in small towns and underserved urban neighborhoods, they need the right strategic partners, the right products, and the right tools to succeed.

Last year, when I began acquiring the strategic pieces of Celero and combining that with my dream team of executives, managers, and performers, I was grateful to find that our stakeholders completely embraced our vision to bring enterprise-level technology in terms of best-in-class payments capabilities and consumable technology tools, to small and mid-sized companies across the country. It’s obvious to me that when you give community bankers—some of the smartest people who are driven to help their business clients as much as they can—the tools to help their customers succeed, you can achieve your own bottom line goals, while helping your partners and their customers achieve theirs, too. Accelerating the growth of our partners and business customers is the core focus. Combining community bank products and services with our fintech offerings creates a formula that positions these small to mid-size businesses to not only survive and compete, but to lead and thrive in a sustainable way.

Aligning your own success to that of your partners and their customers isn’t original, nor should it be particularly noteworthy. But at this point in our history, our community banks need all of us operating on this principle, doing everything we can to work together to serve American business. According to the Small Business and Entrepreneurship Council, firms with fewer than 20 employees account for more than 89 percent of American businesses. That statistic alone tells you the magnitude of what we’re facing here, but I’m glad to know we are partnering with some of the most capable people in business, and commit that Celero will strive to hold up its end of the deal, passionately cultivating the success of our bank partners.

Jeff Brown-July 18, 2019 Practically all commercial banking financial institutions (FI) engage in some form of asset-based lending.  These loans, which take the form of revolving lines of credit or term loans, are secured by the borrower’s assets (as the name implies). How much credit a borrower can access is primarily determined by the quality and value of the collateral, which can range from accounts receivables and inventory to equipment and real estate. 

The purpose of these loans range from working capital augmentation, acquisition, and recapitalization to financing growth through marketing spends, and much more. Repayment is typically looked at as cash flow from operations through collection of accounts receivable and conversion of inventory to cash through increased sales.

Often these loans and/or lines of credit are governed by some type of formula whereby the most collectable accounts receivable and marketable inventory is used to calculate the amount a FI is willing to advance to the borrower.  For instance, the formula might be similar to:

“The FI will advance 80% of accounts receivable less than 60 days old and 20% of inventory less than 90 days old not to exceed $100,000.”

The benefits of these types of loan/lines of credit for both FI and customer are:

·       Increase your borrowing power, especially for companies with less predictable earnings and cash flow

·       Enhance discipline and efficiency around accounts receivables and production for more borrowing capacity

·       Reduce financial covenants, including restrictions around the level of debt to enterprise value or cash flow, and net worth-focused covenants

·       Potentially gain more time to address financial difficulties due to built-in collateral protection

As you consider the collateralization of these loans and lines of credit, merchant credit card deposits that are deposited in your bank each day are often overlooked.  More and more merchants are accepting business-to-business payments via credit card.  Today, the conversion of their accounts receivable is often in the form of a credit card payment and not a check.  These payments are done for convenience, your client’s customers often demand the reward perks that go with B2B charges, or your clients have realized that they can often get paid faster with less bad debt expense by accepting credit cards for payment.  Surcharges have also made it more attractive for B2B merchants to accept credit cards more than ever before.

Due to the highly competitive nature of the payments ecosystem, most merchant credit card processing relationships reside with third parties in today’s marketplace.  As a result, banks have often lost the merchant relationship to payment specialists in the industry.  Those third parties often control a very large portion of your bank’s asset based-lending collateral.  The merchant credit card deposits are often being deposited at an FI other than yours, thus they are out of your immediate control or visibility.

As your FI is establishing its lending policies it should considering making it a condition of approval for all loans secured by accounts receivables and inventory that your bank process the credit card transactions for your customers.  A policy of matching or reducing your client’s payment processing costs can be established so that your client knows they are receiving excellent service and value, your FI benefits by residual income, and your asset-based lending is better secured by having all of your customer’s deposits residing inside your FI.  Why not have complete visibility of your customer’s cash flow via checks deposited, incoming wires, ACH and now credit card deposits? You’ll be able to see increased risks based on the health of the business, as well as opportunities to do more for your clients as they strengthen.

Contact our team at UMS Banking to learn how to implement this plan, reduce your lending risks, and better serve your customers today.