Small businesses favor traditional banks over fintech lenders

There’s been a lot of talk in the financial sector in recent years about the impact that non-traditional fintech players will have on the market.

Some people believe that the emergence of this new breed of companies will be a threat to established banking institutions, while others see opportunities for innovation and cooperation.

However, it seems that in some areas, the benefits of an established brand and a trusted name are still strong, especially when it comes to small business banking.

This is accordingly to a recent survey conducted by the Federal Reserve Bank of New York, which revealed that legacy banks are a much more popular option than new fintech alternatives for small and medium-sized enterprises (SMEs).

It found that small banks offer the most satisfaction, with four-fifths of SMEs (80 percent) viewing these favorably. By comparison, credit unions had a satisfaction score of 78 percent while large banks scored 61 percent. Online lenders, however, performed poorly, with just 46 percent of respondents saying they were satisfied.

One of the main reasons for unhappiness with fintech lenders was the high interest rates charged by these companies, with one in three companies (33 percent) citing this as a factor. This compares with just six percent for large banks and three percent for smaller banks.

However, there are still areas in which legacy banks can learn from their newer competitors. For instance, online lenders performed significantly better when it comes to the difficulty of application processes and the length of time taken to make decisions.

It was noted by Finextra that this figure may well be used by fintechs as evidence that their technology can deliver a superior customer experience to traditional banks.

The publication also noted that the high cost of capital and customer acquisition remain challenges for online lenders, which is one of the key reasons for the higher rates of interest they tend to charge. This is also leading to “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”.

Written by Ian Fergusson