Will Big Bank Capital Requirements Help Smaller FIs, FinTechs Gain Small Business Lending Share?

As banks — especially larger players — grapple with a new capital reality, the opportunity may be there for smaller financial institutions (FIs) and FinTechs to capture some lending share, especially among small businesses.

Bloomberg noted on Wednesday (July 26) that some of the biggest banks are girding for new capital requirements that could be voted on by the Federal Reserve and the FDIC as early as this week that would cut deeply into reserves of excess capital.

Roughly $118 billion of excess capital, to be exact. The new rules, should they crystallize, won’t take effect for some time, perhaps as long as a reported two years. The new rules seem poised to most immediately impact stock buybacks and dividends, which matter to investors.

But the ripple effects might be keenly felt in other areas of the financial services realm. Holding more capital on the books means price increases may be in the offing to offset the restrictions on the capital being deployed elsewhere, including as part of lending activities.

Looking for Capital

The capital restrictions would come in an environment where, as PYMNTS has reported, Main Street small businesses have been looking for sources of capital. Joint research done by PYMNTS and Enigma found that, among 500 firms queried, only slightly more than a quarter of companies have access to the equivalent of at least 60 days’ worth of revenue, and 17% have no ready access to emergency funding. About 17% of respondents said they’d have ready-access financing sources from online lenders, outpacing the 16% who said the same about traditional banks.

The impetus for these smaller firms to raise money where they can may be especially keen given the fact that the Fed has just raised rates by yet another quarter, point, shattering a pause and bringing rates to the highest level in about two decades. The Fed funds rate is now targeted to range between 5.25% to 5.5%, and all manner of debt — including business loans — will reprice (higher) off those levels. Banks, as we reported here, have already been tightening their lending activities, and the small business loan approval rate has been in the mid-teen percentage points.

Our latest data show that roughly half of smaller firms anticipate “shopping” for credit through the next several months. And only about a third of these firms are considering large national banks to do so. Companies like Shopify are launching new credit products to help cement loyalty with these smaller firms. As noted here, the launch of Shopify Credit bases credit limits and eligibility on the merchant’s business performance rather than their personal credit scores. PayPal, too, is in the fray, and has said that it has extended, in collaboration with WebBank, $17 billion in loans through the course of the last decade.

And in an interview with PYMNTS, PSCU CEO Chuck Fagan said that smaller FIs and credit unions are poised, armed with data and personalized relationships, to capture deposits. Deposits, we note, can in turn be lent out as loans … and may do much to give some competitive firepower as small and medium-sized businesses (SMBs) search for the financing they need as interest rates and inflation stay lofty.

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